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HEALTHY OUTCOMES AR 08
CVS Caremark Corporation 2008 Annual Report

Table of contents

  • Page 1
    HEALTHY OUTCOMES AR 08 CVS Caremark Corporation 2008 Annual Report

  • Page 2
    ...health care expenses expected to double over the next decade, plan sponsors are looking for innovative ways to promote healthy outcomes and manage costs. CVS Caremark is taking on this challenge by integrating our leading pharmacy benefit management company with the nation's largest chain of retail...

  • Page 3
    ...58 retail specialty pharmacy stores, 19 specialty mail order pharmacies, six mail service pharmacies, and our CVS.com® and Caremark.com websites. OUR VISION We strive to improve the quality of human life. OUR MISSION We provide expert care and innovative solutions in pharmacy and health care that...

  • Page 4
    ... year end Market capitalization at year end (1) Fiscal Year 2008 and Fiscal Year 2007 include 368 days and 364 days, respectively. TOTAL REVENUES (dollars in millions) STOCK PRICE AT YEAR END (at calendar year end in dollars) ANNUAL DIVIDENDS DECLARED (in dollars) 87,471.9 76,329.5 43,821...

  • Page 5
    HEALTHY OUTCOME NO 1 Improved Health and Wellness As one of the nation's largest PBMs, CVS Caremark plays a critical role in the way health care is delivered today. We do this, in part, through our traditional strengths in generic substitution, mail service, network management, clinical programs,...

  • Page 6
    ... in-store discounts on CVS brand products eligible for reimbursement from Flexible Spending Accounts. Our CVS/pharmacy® Health Savings Pass is another new offering. For just $10 annually, consumers can fill a 90-day prescription for any of more than 400 common generic maintenance medications for...

  • Page 7
    ... outcomes for patients. With CVS Caremark's network of retail pharmacies as well as our mail order pharmacies, specialty pharmacies, and MinuteClinics, we're bringing a new level of convenience to pharmacy health care. For example, some people love to get their 90-day maintenance prescriptions...

  • Page 8
    ... Pharmacy Care services that help us contribute to healthy outcomes for patients. Maintenance Choice is another. Many of our plan participants now have the convenient option of obtaining their 90-day prescriptions at any CVS/pharmacy store at the same cost as mail for both the plan participant...

  • Page 9
    ... Maintenance Choice, he picks up his 90-day supplies at CVS/pharmacy. PARTICIPANT SAVINGS PLAN SAVINGS $320 $415 PARTICIPANT SAVINGS PLAN SAVINGS $600 $2,400 MARK REYES ALLIE REYES Allie controls her allergies with an OTC, CVS brand generic antihistamine purchased with an ExtraCare Health card...

  • Page 10
    ... the landmark 2007 merger of CVS and Caremark. Today, we are the nation's largest pharmacy health care company. With U.S. health care costs expected to reach more than $4 trillion annually over the next decade, we are beginning to deliver healthy outcomes for patients and driving down costs in ways...

  • Page 11
    ...these medications are used by only a small fraction of the population. Payors need help managing these costs and CVS Caremark is the clear category leader. Based on prescriptions we fill or manage, we have a 27 percent share of the $38 billion specialty market addressable by PBMs and drug retailers...

  • Page 12
    ... strategic role for our PBM as it pursues new contracts. We can extend our Proactive Pharmacy Care offerings to plan sponsors with active or retired employees living in these markets. 8 CVS CAREMARK I've often said that we don't acquire stores for growth. Rather, we acquire stores that we can grow...

  • Page 13
    ... to prescription drugs would be good for CVS Caremark and good for the country. Legislation paving the way for a biogeneric approval process as well as growth in e-prescribing is also on the horizon. We look forward to working with the new administration on health care reform. On behalf of the board...

  • Page 14
    ..., has Caremark's focus changed much since the merger? A. HOWARD MCLURE: Not really. We were a state-of-the-art PBM before, and we remain one today. We're still working hard to lower costs for our clients by driving mail order pharmacy and generic utilization, and helping them manage their specialty...

  • Page 15
    ... health care. Q. Specialty accounts for the fastest growing sector in pharmaceutical spend today. How will CVS Caremark help rein in costs? A. LM: Beauty remains one of the key front-end categories in our CVS/pharmacy stores, so we've been leveraging that expertise by pilot-testing this new retail...

  • Page 16
    ... centers and receiving prescriptions through mail order works best. Many others prefer the option of visiting one of our convenient retail or specialty stores. Here we invite you to the future of pharmacy care by following the journey of one CVS Caremark plan participant, Anna S., a diabetes patient...

  • Page 17
    ...fill, Anna learns that she is eligible through her plan sponsor for Maintenance Choice. She can receive a 90-day supply at a lower co-pay - and get it by mail or right in the store. NO 6 VISITING MINUTECLINIC NO 7 IDENTIFYING THERAPY GAPS NO 8 ADHERENCE COUNSELING Anna's CVS/pharmacy has...

  • Page 18
    ... of customer service. Take the case of John C., a newly diagnosed rheumatoid arthritis patient: EASY BILLING When John brings his specialty medication prescription to his CVS/pharmacy, he learns his benefits do not cover the treatment. Our pharmacist seamlessly refers John's order to CVS Caremark...

  • Page 19
    ...IN-STORE PICKUP Now that John is working again, he is concerned about the safety of his refills if he isn't home to receive them. His CVS Caremark Specialty Pharmacy service representative informs him that we can fill his specialty prescription at a CVS/pharmacy near his home. SPECIALTY SERVICES...

  • Page 20
    ... than ever before. In 2008, we donated $39 million through a combination of cash, in-kind contributions, and volunteer hours to worthy causes across the nation. Whether it's a team of volunteers from the CVS Caremark Customer Call Center in Knoxville working at a food pantry or the contributions we...

  • Page 21
    ... of Operations Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Shareholders' Equity Notes to Consolidated Financial Statements Five-Year Financial Summary Reports of Independent Registered Public Accounting Firms Stock Performance 2008 ANNUAL REPORT 17

  • Page 22
    ... Supply of their prescriptions at any CVS/pharmacy at no additional charge); and a new ExtraCare® Health Card program (which offers discounts to eligible plan participants on certain Flexible Spending Account-eligible over-the-counter health care products sold in any of our CVS/pharmacy stores...

  • Page 23
    ... to plan participants. Prescription drugs are dispensed by our mail order pharmacies, specialty pharmacies and national network of retail pharmacies. Net revenues are also generated by providing additional services to clients, including administrative services such as claims processing and formulary...

  • Page 24
    ... from the merger date (March 22, 2007) forward. • Effective October 20, 2008, we acquired Longs Drug Stores Corporation, which included 529 retail drug stores (the "Longs Drug Stores"), RxAmerica, LLC ("RxAmerica"), which provides pharmacy benefit management services and Medicare Part D bene...

  • Page 25
    ... the income tax provision of $11.0 million. For internal comparisons, we find it useful to assess year-to-year performance by excluding the effect of this reversal from our 2006 results. As such, we consider 39.0% to be our comparable effective income tax rate for 2006. 2008 ANNUAL REPORT 21

  • Page 26
    ... about Retail Co-Payments. (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 segments record the revenue on a standalone basis. 22 CVS CAREMARK

  • Page 27
    ... the consummation of the Caremark Merger, resulting from the change-in-control provisions in certain Caremark employment agreements, and merger-related costs of $150.1 million. (3) 2008 includes the results of RxAmerica from the acquisition date (October 20, 2008) forward. 2008 ANNUAL REPORT 23

  • Page 28
    ...a number PharmaCare's retail pharmacy network contracts to the Caremark contract structure, which resulted in those contracts being accounted for using the gross method. As a result, net revenues increased by approximately $1.8 billion and $1.0 billion during 2008 and 2007, compared to 2007 and 2006...

  • Page 29
    ...ted from our participation in the administration of the Medicare Part D drug benefit by providing PBM services to our health plan clients and other clients that have qualified as a Medicare Part D Prescription Drug Plan (a "PDP"). We are also a national provider of drug benefits to eligible bene...

  • Page 30
    ... customers, (ii) obtain new business, and (iii) maintain or improve the purchase discounts we received from manufacturers, wholesalers and retail pharmacies. In that regard, during the 2008 selling season, the Company renewed a number of existing clients and obtained new clients at lower rates...

  • Page 31
    ...consuming a greater number of prescription drugs. In addition, the increased use of pharmaceuticals as the first line of defense for individual health care also contributed to the growing demand for pharmacy services. We believe these favorable industry trends will continue. 2008 ANNUAL REPORT 27

  • Page 32
    ... • The Federal Government's Medicare Part D benefit is increasing prescription utilization. However, it is also decreasing our pharmacy gross profit rates as our higher gross profit business (e.g., cash customers) continued to migrate to Part D coverage during 2008. • On February 8, 2006, the...

  • Page 33
    ...Drug Stores and RxAmerica from the acquisition date (October 20, 2008) forward. The increase in net cash provided by operations during 2007 was primarily due to an increase in cash receipts from revenues due to the Caremark Merger and improved operating performance. The increase in net cash provided...

  • Page 34
    ... debt assumed as part of the Longs Acquisition. Net cash provided by financing activities during 2007 was primarily due to the increase in long-term borrowings used to fund the special cash dividend paid to Caremark shareholders in connection with the Caremark Merger and was offset, in part, by the...

  • Page 35
    ...debt ratings have a direct impact on our future borrowing costs, access to capital markets and new store operating lease costs. Quarterly Dividend Increase. On January 12, 2009, the Company's Board of Directors approved a 10.5% increase in the quarterly dividend on the common stock of the Company to...

  • Page 36
    ...limited to, general economic conditions, efforts of third party organizations to reduce their prescription drug costs and/or increased member co-payments, the continued efforts of competitors to gain market share and consumer spending patterns. Goodwill and Intangible Assets We account for goodwill...

  • Page 37
    ... economic conditions, availability of market information as well as the profitability of the Company. Goodwill is tested on a reporting unit basis using the expected present value of future cash ï¬,ows. In accordance with SFAS 142, goodwill impairment is determined using a two-step process. The...

  • Page 38
    ... our CVS/pharmacy stores, average cost to determine cost of sales and inventory in our mail service and specialty pharmacies and the cost method of accounting to determine inventory in the Longs Drug Stores and our distribution centers. The Longs Drug Stores will be conformed to the retail method of...

  • Page 39
    ... or on behalf of CVS Caremark Corporation. The Company and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission and in its reports to stockholders. Generally...

  • Page 40
    ... efforts of health maintenance organizations, managed care organizations, pharmacy benefit management companies and other third party payors to reduce prescription drug costs and pharmacy reimbursement rates, particularly with respect to generic pharmaceuticals; • The possibility of client loss...

  • Page 41
    ..., process, summarize and report a system of internal accounting controls and procedures to provide reasonable assurance, at an appropriate cost/benefit relationship, that the unauthorized acquisition, use or disposition of assets are prevented or timely detected and that transactions are authorized...

  • Page 42
    ... Public Company Accounting Oversight Board (United States), the consolidated balance sheet of CVS Caremark Corporation as of December 31, 2008 and the related consolidated statements of operations, shareholders' equity and cash ï¬,ows for the fiscal year ended December 31, 2008 and our report dated...

  • Page 43
    ..., 2007 $ 76,329.5 60,221.8 16,107.7 11,314.4 4,793.3 434.6 4,358.7 1,721.7 2,637.0 - 2,637.0 14.2 $ $ 2,622.8 1.97 - $ 1.97 1,328.2 $ 1.92 - $ 1.92 1,371.8 $ 0.22875 Dec. 30, 2006 $...Dividends declared per common share See accompanying notes to consolidated financial statements. 2008 ANNUAL REPORT...

  • Page 44
    ... - 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 Intangible assets, net Other assets Total assets LIABILITIES: Accounts payable Claims and discounts payable...

  • Page 45
    ...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....7) 1,742.4 2008 ANNUAL REPORT 41

  • Page 46
    ... End of year COMMON STOCK: Beginning of year Common stock issued for Caremark Merger Stock options exercised and awards End of year TREASURY STOCK: Beginning of year Purchase of treasury shares Conversion of preference stock Transfer from Trust Employee stock purchase plan issuance End of year...

  • Page 47
    ...Dollars Dec. 30, 2006 Dec. 31, 2008 Dec. 31, 2008 Dec. 29, 2007 Dec. 29, 2007 Dec. 30, 2006 Beginning of year Recognition of unrealized gain/(loss) on derivatives, net of income tax Pension liability adjustment, net of income tax Pension liability adjustment to initially apply SFAS No.158, net...

  • Page 48
    ...Prescription drugs are dispensed by our mail order pharmacies, specialty pharmacies and national network of retail pharmacies. Net revenues are also generated by providing 1 SIGNIFICANT ACCOUNTING POLICIES additional services to clients, including administrative services such as claims processing...

  • Page 49
    ... providers (e.g., pharmacy benefit managers, insurance companies and governmental agencies) and vendors as well as clients, participants and manufacturers. Fair value of financial instruments. As of December 31, 2008, the Company's financial instruments include cash and cash equivalents, accounts...

  • Page 50
    ...under its customer contracts typically include validating eligibility and coverage levels, communicating the Revenue Recognition: Pharmacy Services Segment. The PSS sells prescription drugs directly through its mail service pharmacies and indirectly through its national retail pharmacy network. The...

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

  • Page 52
    ...health and medical liabilities. The Company's self-insurance accruals, which include reported claims and claims incurred but not reported, are calculated using standard insurance industry actuarial assumptions and the Company's historical claims experience. Store opening and closing costs. New store...

  • Page 53
    ... 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 10 for additional information about stock-based compensation. Income taxes. The Company provides for federal and state income taxes currently payable, as well as...

  • Page 54
    ... benefit 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 requires the recognition of a liability for the discounted value of the...

  • Page 55
    ...respectively. The merger was accounted for using the purchase method of accounting under SFAS 141. The Longs Acquisition included 529 retail drug stores, RxAmerica, LLC, which provides pharmacy benefit management services and Medicare Part D benefits and other related assets. The Company's results...

  • Page 56
    ... the third quarter of 2008, the Company performed its required annual goodwill impairment tests. The Company concluded there were no goodwill impairments as of the testing date or December 31, 2008. Indefinitely-lived intangible assets are tested by comparing the estimated fair value of the asset...

  • Page 57
    ... PROGRAM NO 5 BORROWING AND CREDIT AGREEMENTS On May 7, 2008, the Company's Board of Directors authorized effective May 21, 2008, a share repurchase program for up to $2.0 billion of outstanding common stock. The specific timing and amount of repurchases will vary based on market conditions...

  • Page 58
    ... NO The Company offers Medicare Part D benefits through SilverScript, which has contracted with CMS to be a PDP and, pursuant to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("MMA"), must be a risk-bearing entity regulated under state insurance laws or similar statutes...

  • Page 59
    ... to receive an annual dividend of $3.90 per share. The ESOP Trust used the dividends received and contributions from the Company to repay the ESOP Notes. As the ESOP Notes were repaid, ESOP Preference Stock was allocated to plan participants based on (i) the ratio of each year's debt service payment...

  • Page 60
    ... care 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 health care costs...

  • Page 61
    ...-term performance awards will be in cash, stock, other awards or other property, in the discretion of the Management Planning and Development Committee of the Company's Board of Directors, with any payment in stock to be pursuant to the ICP discussed previously in this document. 2008 ANNUAL REPORT...

  • Page 62
    ....1 million during 2007 and 2006, respectively. The 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: 2008 2007 2006 Dividend yield(1) Expected volatility(2) Risk-free interest rate(3) Expected life (in...

  • Page 63
    ...ficant components of the Company's deferred tax assets and liabilities as of the respective balance sheet dates: 2006 Dec. 31, 2008 $ 317.6 72.9 241.3 91.2 95.4 13.8 234.4 13.2 1,079.8 (4,346.3) (4,346.3) Dec. 29, 2007 2008 2007 In millions Current: Federal State $ 1,680.4 364.5 2,044.9 132...

  • Page 64
    ...'s 2006 consolidated U.S. income tax return and Caremark's 2004 and 2005 consolidated U.S. income tax returns. The IRS is currently examining the Company's 2007 and 2008 consolidated U.S. income tax returns pursuant to the Compliance Assurance Process ("CAP") program. The CAP program is a voluntary...

  • Page 65
    ...on contract terms between the pharmacies and AdvancePCS. In October 2003, two independent pharmacies, North Jackson Pharmacy, Inc. and C&C, Inc. d/b/a Big C Discount Drugs, Inc. filed a putative class action complaint in Alabama federal court against Caremark, Caremark Inc., AdvancePCS (acquired by...

  • Page 66
    ... and $4,618.2 million of Retail Co-Payments in 2008 and 2007 respectively. (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...

  • Page 67
    ...2006 1,368.9 (13.9) 1,355.0 - 1,355.0 1,368.9 (4.2) 1,364.7 - 1,364.7 820.6 18.8 11.5 2.3 853.2 1.65 - 1.65 1.60 - 1.60 Numerator for earnings per common share calculation: Earnings from continuing operations Preference dividends, net of income tax... operations Net earnings 2008 ANNUAL REPORT 63

  • Page 68
    ... per common share Stock price: (New York Stock Exchange) High Low 2007: Net revenues Gross profit Operating profit Net earnings Net earnings per common share, basic Net earnings per common share, diluted Dividends per common share Stock price: (New York Stock Exchange) High Low $ 13,188.6 3,303...

  • Page 69
    ... to receive 1.67 shares of CVS Caremark's common stock, par value $0.01 per share. Cash was paid in lieu of fractional shares. (3) In 2006, the Company adopted the Securities and Exchange Commission (SEC) Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements...

  • Page 70
    ... Collateral Assignment Split-Dollar Life Insurance Arrangements. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CVS Caremark Corporation's internal control over financial reporting as of December 31, 2008, based on criteria...

  • Page 71
    ...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 supporting the...

  • Page 72
    ... Annual Return Rate (5 Year) 10.4% -2.2% 0.1% 2003 CVS Caremark Corporation S&P 500(1) S&P 500 Food & Staples Retail Group Index(2) (1) Index includes CVS Caremark 2004 $126 $111 $103 Year End 2005 2006 $148 $116 $ 99 $174 $135 $106 2007 $225 $142 $112 2008 $164 $ 90 $100 Annual Return Rate...

  • Page 73
    ... of the Board and Chief Executive Officer Nalco Company JONATHAN C. ROBERTS Executive Vice President - Rx Purchasing, Pricing and Network Relations JEAN-PIERRE MILLON(2) Former President and Chief Executive Officer PCS Health Services, Inc. DIRECT STOCK PURCHASE/DIVIDEND REINVESTMENT PROGRAM...

  • Page 74
    ... Drive Woonsocket, RI 02895 (401) 765-1500 www.cvscaremark.com 10% The 2008 CVS Caremark Annual Report saved the following resources by printing on paper containing 10% postconsumer recycled content. energy solid waste greenhouse gases waterborne waste trees waste water 114.38 fully grown 48...