Caremark 2007 Annual Report Download

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The Power of One
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Table of contents

  • Page 1
    The Power of One :MJ:Xi\dXib:figfiXk`fe)''.8eelXcI\gfik

  • Page 2
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  • Page 4
    CVS Caremark Financial Highlights `ed`cc`fej#\oZ\gkg\ij_Xi\Ã"^li\j  2007 52 weeks  .-#*)0 0 0) *0 2006 52 weeks 0 0( % change...Total Revenues [fccXij`ed`cc`fej Stock Price at Year End XkZXc\e[Xip\Xi\e[`e[fccXij Annual Dividends Declared `e[fccXij .-#*)0%, *'%0 ...

  • Page 5
    ... new company and our plans for improving the delivery of pharmacy and health care services in the United States. # in 1 Prescriptions CVS Caremark fills or manages more than 1 billion prescriptions annually through our retail and specialty pharmacy stores, mail order facilities, and PBM retail...

  • Page 6
    ... our 20 specialty mail order pharmacies, our 56 specialty pharmacy stores, and CVS/pharmacy locations. Specialty costs are rising rapidly for payors, and we're uniquely positioned to help our PBM clients control spending with our advanced utilization management guidelines, clinical expertise, and...

  • Page 7
    # in 1 Store Count With nearly 6,300 CVS/pharmacy locations and 56 specialty pharmacy stores from coast to coast, we operate more stores than any other U.S. drugstore chain. More than 60 percent are freestanding, making it "CVS easy" for customers to fill prescriptions, replenish the medicine ...

  • Page 8
    ... operator of retail health clinics? in cvs caremark, you get a company with the potential to have a major impact on the way pharmacy and health care services in the united states are delivered. we plan to leverage our unique combination to help payors control costs more effectively, improve...

  • Page 9
    ... covered lives can walk into a cvs/pharmacy with the confidence that their pharmacist has a complete overview of their individual history. that includes routine prescriptions filled in our stores, mail order pharmacies, or at cvs.com; participation in one of caremark's leading health management...

  • Page 10
     I CVS Caremark One Goal "CVS Caremark is positioned to improve access for patients, promote better health outcomes, and control payor costs in a way that no pharmacy retailer or PBM could do separately." Tom Ryan I Chairman of the Board, President & CEO

  • Page 11
    ... our company's history as we completed the transformational merger of CVS Corporation and Caremark Rx, Inc. We are now the largest integrated provider of prescriptions and related health services in the United States, filling or managing more than a quarter of all prescriptions in the nation. Beyond...

  • Page 12
    ... drive margin expansion. Moreover, CVS Caremark is now the largest purchaser of generic drugs in the United States, which enables us to drive down costs. In 007, the company had a  percent generic dispensing rate at retail. With approximately $70 billion in branded drug sales coming off patent in...

  • Page 13
    ... approval process at the U.S. Food and Drug Administration. We will be well positioned if or when this occurs. We continue to open new stores and make the most of recent acquisitions. Despite the past year's merger activity, we continued to execute our organic growth strategy at retail. CVS/pharmacy...

  • Page 14
    ...our front-end sales. We even stand to benefit if consumers turn to our high-quality, lower-cost CVS store brand products to save money. We're expanding MinuteClinic as part of our broader health care offerings. For many CVS/pharmacy customers, 007 presented them with their first chance to visit one...

  • Page 15
    ... President CVS/pharmacy - Retail Chris Bodine President CVS Caremark Health Care Services "Caremark has long had a reputation for strong clinical programs and superior customer service. Now we have an opportunity to take our offerings to the next level and provide payors and patients with options...

  • Page 16
    ... questions our customers have about their prescriptions, instore pharmacists are available to help seniors understand new Medicare Part D prescription drug plans. Every CVS/pharmacy offers a complete selection of national and CVS store brand overthe-counter remedies. All are FDA tested and approved...

  • Page 17
    1 I 007 Annual Report 2 1 3 4

  • Page 18
    ... pharmacy service providers. In 2008, the ExtraCare Health card we are introducing for PBM clients will provide beneficial health promotions for their plan members. 1 I CVS Caremark 1 We filled approximately 74 million traditional and specialty prescriptions by mail in 2007. Clinical pharmacists...

  • Page 19
    1 I 007 Annual Report 2 1 3 4

  • Page 20
    ...retail clinics accredited by The Joint Commission, and it accepts reimbursement from most insurance plans. 2 MinuteClinics will play an increasingly important role in CVS Caremark's drive to lower the cost of health care for insurance plans and self-insured employers. Each location provides quality...

  • Page 21
    Stock Performance The following graph shows changes over the past five-year period in the value of $100 invested in: (1) our common stock; (2) S&P 500 Index; (3) S&P 500 Food & Staples Retail Group Index, which currently includes nine retail companies. Comparison of Cumulative Total Return to ...

  • Page 22
    ...services company, we drive value for our customers by effectively managing pharmaceutical costs and improving healthcare outcomes through our approximately 6,200 CVS/pharmacy® stores; our pharmacy benefit management, mail order and specialty pharmacy division, Caremark Pharmacy Services; our retail...

  • Page 23
    ... our mail order pharmacies and our national network of 60,000 retail pharmacies (which include CVS/pharmacy stores) to eligible participants in benefit plans maintained by our customers and utilize our information systems to perform safety checks, drug interaction screening and generic substitution...

  • Page 24
    ... by contracting with clients to provide prescription drugs to plan participants. Prescription drugs are dispensed by our mail order pharmacies, our specialty pharmacies and by retail pharmacies in our national network (including CVS/pharmacy stores). Net 0 I CVS Caremark Results of Operations and...

  • Page 25
    ... Merger, which resulted in a change in the allocation of income between states. • During 2007 and 2006, our effective income tax rate was negatively impacted by the implementation of SFAS No.123(R) "Share-Based Payment", as the compensation expense associated with our employee stock purchase plan...

  • Page 26
    ... include approximately $4,618.2 million of Retail Co-Payments for 2007.  I CVS Caremark (2) Intersegment eliminations relate to intersegment revenues that occur when a Pharmacy Services Segment customer uses a Retail Pharmacy Segment store to purchase covered products. When this occurs, both...

  • Page 27
    ... of over-the-counter remedies that were historically only available by prescription. We may choose not to participate in certain prescription benefit programs that mandate filling maintenance prescriptions through a mail order service facility or that implement pharmacy reimbursement rates that fall...

  • Page 28
    ... The introduction of the Federal Government's new Medicare  I CVS Caremark • Our pharmacy gross profit rates have been adversely affected by the efforts of managed care organizations, pharmacy benefit managers, governmental and other third party payors to reduce their prescription costs. In the...

  • Page 29
    ... expenses % of net revenues Operating profit Operating profit % of net revenues Net revenues: Mail service Retail network Other Pharmacy claims processed: Total Mail service Retail network Generic dispensing rate: Total Mail service Retail network Mail order penetration rate: $ 2007 34,938.4 2,997...

  • Page 30
    ... in mail service and retail network revenue are primarily impacted by changes in pharmacy claims processed, drug cost inflation, customer and claims mix, customer pricing and generic dispensing rates. Increases in generic dispensing rates have the effect of reducing total net revenues. Our business...

  • Page 31
    ... dispensed, either directly through our mail service and specialty retail pharmacies or indirectly through our national retail pharmacy network, shipping and handling costs and the operating costs of our mail service pharmacies, customer service operations and related information technology...

  • Page 32
    ... and retail specialty pharmacy store and administrative payroll, employee benefits 8 I CVS Caremark Liquidity and Capital Resources We anticipate that our cash flow from operations, supplemented by commercial paper and long-term borrowings will continue to fund the future growth of our business...

  • Page 33
    ... public debt rating. As of December 29, 2007, we had no outstanding borrowings against the credit facilities. In connection with the Caremark Merger, on March 28, 2007, we commenced a tender offer to purchase up to 150 million common shares, or about 10%, of our outstanding common stock at a price...

  • Page 34
    ... grade, we cannot guarantee the future actions of Moody's and/or Standard & Poor's. Our debt ratings have a direct impact on our future borrowing costs, access to capital markets and new store operating lease costs. settlement of the November ASR agreement discussed previously. We will, however...

  • Page 35
    ..., customer contracts and relationships, favorable and unfavorable leases and covenants not to compete. These intangible assets arise primarily from the allocation of the purchase price of businesses acquired to identifiable intangible assets based on their respective fair market values at the date...

  • Page 36
    ...royalty payments to their present value over the estimated economic life of the asset. 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...

  • Page 37
    ...to limit our total liability exposure. We are also self-insured for certain losses related to health and medical liabilities. The estimate of our self-insurance liability contains uncertainty  I 007 Annual Report Closed Store Lease Liability We account for closed store lease termination costs in...

  • Page 38
    ...mail service and specialty pharmacies and the cost method of accounting to determine inventory in our distribution centers. Under the retail method, inventory is stated at cost, which is determined by applying a cost-to-retail ratio to the ending retail value of our inventory. Since the retail value...

  • Page 39
    ... is effective for fiscal years beginning after December 15, 2008. As of December 29, 2007, the Company has $176.6 million of unrecognized tax benefits (after considering the federal benefit of state taxes) related to business combinations that be would treated as an adjustment to the purchase price...

  • Page 40
    .... discounts and/or rebates from pharmaceutical manufacturers at current levels; • Risks regarding the impact of the new Medicare prescription drug benefit on our business; • Risks related to the change in industry pricing benchmarks that could adversely affect our financial performance...

  • Page 41
    ...testing of the operating effectiveness of controls. 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...

  • Page 42
    ... over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control...

  • Page 43
    ...Cost of revenues Gross profit Total operating expenses Operating profit Interest expense, net Earnings before income tax provision Income tax provision Net earnings Preference dividends, net of income tax benefit...224.7 14.1 1,210.6 1.49 811.4 1.45 841.6 0.14500 $ $ $ $ $ $ 9 I 007 Annual Report

  • Page 44
    ... Claims and discounts payable Accrued expenses Short-term debt Current portion of long-term debt Total current liabilities Long-term debt Deferred income taxes Other long-term liabilities Commitments and contingencies (Note 11) SHAREHOLDERS' EQUITY: Preferred stock, $0.01 par value: authorized...

  • Page 45
    ... and amortization Stock based compensation Deferred income taxes and other non-cash items Change in operating assets and liabilities providing/ (requiring) cash, net of effects from acquisitions: Accounts receivable, net Inventories Other current assets Other assets Accounts payable Accrued expenses...

  • Page 46
    ... HELD IN TRUST: Beginning of year Shares acquired through Caremark Merger End of year CAPITAL SURPLUS: Beginning of year Common stock issued for Caremark Merger, net of issuance costs Stock option activity and awards Tax benefit on stock options and awards Conversion of preference stock End of year...

  • Page 47
    ...tax benefit End of year RETAINED EARNINGS: Beginning of year Net earnings Common stock dividends Preference stock dividends Tax benefit on preference stock dividends... 23.6 1,392.2 $ $ $ - (90.3) 5,645.5 1,224.7 (117.5) (16.2) 2.1 - 6,738.6 8,331.2 1,224.7 2.9 (37.7) 1,189.9  I 007 Annual Report

  • Page 48
    ... are located in CVS/pharmacy retail stores. The pharmacy services business provides a full range of pharmacy benefit management services including mail order pharmacy services, specialty pharmacy services, plan design and administra I CVS Caremark Stock Split On May 12, 2005, the Company's Board...

  • Page 49
    ... in our mail service and specialty pharmacies and the cost method of accounting to determine inventory in our distribution centers. Independent physical inventory counts are taken on a regular basis in each store and distribution center location (other than six distribution centers, which perform...

  • Page 50
    ... future cash flows (discounted and with interest charges). If required, an impairment loss is recorded for the portion of the asset group's carrying value that exceeds the asset group's  I CVS Caremark in its customers' benefit plans and (iii) administrative fees for national retail pharmacy...

  • Page 51
    ... to participants in customers' benefit plans from the PSS' mail service pharmacies, net of any volume-related or other discounts (see "Drug Discounts" above) and (ii) the cost of prescription drugs sold (including Retail Co-Payments) through the PSS' national retail pharmacy network under contracts...

  • Page 52
    ... using standard insurance industry actuarial assumptions and the Company's historical claims experience. Store Opening and Closing Costs New store opening costs, other than capital expenditures, are charged directly to expense when incurred. When the Company closes a store, the present value of...

  • Page 53
    ... such, no stock-based employee compensation costs were reflected in net earnings for options granted under those plans since they had an exercise price equal to the fair market value of the underlying common stock on the date of grant. See Note 8 for further information on stock-based compensation.

  • Page 54
    ... plan exists), or Accounting Principles Board Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) to endorsement split-dollar life insurance arrangements. SFAS 106 would require the Company to recognize a liability for the discounted value of the future...

  • Page 55
    ... time of the merger. In addition, Caremark shareholders of record as of the close of business on the day immediately preceding the closing date of the merger received a special cash dividend of $7.50 per share. The merger was accounted for using the purchase method of accounting under U.S. Generally...

  • Page 56
    ...based on a 52 week fiscal year ending on the Saturday nearest to December 31. (2) Inter-company revenues that occur when a Caremark customer uses a CVS/pharmacy retail store to purchase covered products were eliminated. These adjustments had no impact on pro forma net earnings or pro forma earnings...

  • Page 57
    ...Annual Report In millions Trademarks (indefinitely-lived) Customer contracts and relationships and Covenants not to compete Favorable leases and Other $ $ $ $ (563.4) (128.2) (691.6) #  Share Repurchase Program stock to the Company, which were placed into its treasury account upon delivery...

  • Page 58
    ... due 2017 6.25% senior notes due 2027 8.52% ESOP notes due 2008(1) 6.302% Enhanced Capital Advantage Preferred Securities Mortgage notes payable Capital lease obligations Less: Short-term debt Current portion of long-term debt (1) See Note 8 for further information about the Company's ESOP Plan.

  • Page 59
    ... Present value of capital lease obligations $ Capital Leases 16.0 16.0 16.1 16.2 16.5 256.5 337.3 (192.2) 145.1 $ Operating Leases 1,584.5 1,548.3 1,654.5 1,418.2 1,500.5 14,384.6 $ 22,090.6  I 007 Annual Report $ $ $ 22,090.6 The Company finances a portion of its store development program...

  • Page 60
    ... Plan The Company offers Medicare Part D benefits through its whollyowned subsidiary SilverScript Insurance Company ("SilverScript") which has been approved by the CMS as a PDP. SilverScript has contracted with CMS to be the Company's PDP and, pursuant to the Medicare Prescription Drug, Improvement...

  • Page 61
    ... and life insurance benefits to certain retirees who meet eligibility requirements. The 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 healthcare costs to...

  • Page 62
    ... for options granted under those plans since they had an exercise price equal to the fair market value of the underlying common stock on the date of grant. Compensation expense related to stock options, which includes the 1999 Employee Stock Purchase Plan ("1999 ESPP") and the 2007 Employee Stock...

  • Page 63
    ...). (4) The expected life is based on the semi-annual purchase period. The Company's 1997 Incentive Compensation Plan (the "ICP") provides for the granting of up to 152.8 million shares of common stock in the form of stock options and other awards to selected officers, employees and directors of the...

  • Page 64
    ... CVS Caremark The fair value of each stock option is estimated using the BlackScholes Option Pricing Model based on the following assumptions at the time of grant: 2007 Dividend yield(1) Expected volatility (2) Risk-free interest rate(3) Expected life (in years) (4) Weighted average grant date fair...

  • Page 65
    ...pending. In December 2007, the Company received a document subpoena from the Office of Inspector General within the United States Department of Health and Human Services requesting certain information relating to the processing of Medicaid claims and claims of certain other government programs on an...

  • Page 66
    ... class action lawsuit filed on October 22, 2003 in Alabama state court by John Lauriello, purportedly on behalf of participants in the 1999 settlement of various securities class action and derivative lawsuits against Caremark and others. Other defendants include insurance companies that provided...

  • Page 67
    ... business practices of PBMs, including practices relating to pricing, rebates, formulary management, data utilization and accounting and administrative processes. Discovery in the case is ongoing. The Rhode Island Attorney General's Office, the Rhode Island Ethics Commission, and the United States...

  • Page 68
    ... Balance $ 2007 43.2 207.5 4.5 (6.7) (2.0) (13.1) 233.4  I CVS Caremark Following is a summary of the significant components of the Company's deferred tax assets and liabilities as of the respective balance sheet dates: In millions Deferred tax assets: Lease and rents Inventory Employee benefits...

  • Page 69
    .... These services include mail order pharmacy services, specialty pharmacy services, plan design and administration, formulary management and claims processing, as well as providing insurance and reinsurance services in conjunction with prescription drug benefit plans. The specialty pharmacy business...

  • Page 70
    ... include approximately $4,618.2 million of Retail Co-Payments in 2007. (2) Intersegment eliminations relate to intersegment revenues and accounts receivable that occur when a Pharmacy Services Segment customer uses a Retail Pharmacy Segment store to purchase covered products. When this occurs, both...

  • Page 71
    ....6 1.49 7 I 007 Annual Report Following is a reconciliation of basic and diluted earnings per common share for the respective years: In millions, except per share amounts NUMERATOR FOR EARNINGS PER COMMON SHARE CALCULATION: Net earnings Preference dividends, net of income tax benefit Net earnings...

  • Page 72
    ... common share, basic (1) Net earnings per common share, diluted(1) Dividends per common share Stock price: (New York Stock Exchange) High Low $ 8 I CVS Caremark 9,979.9 2,594.8 560.5 329.6 0.40 0.39 0.03875 30... fiscal year 2006 include the $24.7 million after-tax effect of adopting SAB No. 108.

  • Page 73
    ... I 007 Annual Report $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ (1) Effective March 22, 2007, pursuant to the Agreement and Plan of Merger dated as of November 1, 2006, as amended (the "Merger Agreement"), Caremark Rx, Inc. ("Caremark") was merged with and into a newly formed subsidiary of CVS Corporation...

  • Page 74
    ... the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence...

  • Page 75
    ... in Note 1 to the consolidated financial statements, CVS Caremark Corporation adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment," effective January 1, 2006. 71 I 007 Annual Report KPMG LLP Providence, Rhode Island February 27, 2007

  • Page 76
    ... Nalco Company 7 i CVS Caremark V. Michael Ferdinandi Senior Vice President - Human Resources and Corporate Communications Jean-Pierre Millon(2) Former President and Chief Executive Officer PCS Health Services, Inc. Direct Stock Purchase/Dividend Reinvestment Program BuyDIRECTSM provides...

  • Page 77
    ...%Zfd&Zfddle`kp%  ( CVS Caremark colleagues and family members are regular participants in Easter Seals Walk With Me fundraising events around the country, such as this one in Chicago, Illinois. Our colleagues are scheduled to participate in a total of 43 during 2008. Boston Red Sox Hitting Coach...

  • Page 78
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