Caremark 2009 Annual Report Download

Download and view the complete annual report

Please find the complete 2009 Caremark annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 80

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80

2009 ANNUAL REPORT
Pharmacy Innovation
In a Changing Health Care
Environment

Table of contents

  • Page 1
    2 0 0 9 A N N U A L R E P O RT Pharmacy Innovation In a Changing Health Care Environment

  • Page 2
    ... to Shareholders Pharmacy Benefits Management Retail Pharmacy Integrated Pharmacy Care Q&A with Per Lofberg and Larry Merlo Making a Positive Impact on Our Communities 2009 Financial Report Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Report on...

  • Page 3
    ... their members. CVS Caremark is a market leader in mail order pharmacy, retail pharmacy, specialty pharmacy, and retail clinics, and is a leading provider of Medicare Part D Prescription Drug Plans. As one of the country's largest pharmacy benefits managers (PBMs), we provide access to a network of...

  • Page 4
    ... of dollars) STOCK PRICE AT YEAR-END (in dollars) ANNUAL DIVIDEND DECLARED (in cents per common share) 100 90 80 70 60 50 40 30 20 10 0 2007 2008 76.3 87.5 98.7 45 40 35 30 25 20 15 10 5 0 28.74 39.75 32.21 35 30 25 20 15 10 5 0 2007 2008 2009 2007 2008 2009 25.8 22...

  • Page 5
    ...winners. CVS Caremark already has programs in place that do an outstanding job of controlling costs for payors and patients while promoting better health outcomes. Moreover, we are well positioned to take our efforts to the next level. Our pharmacy benefits management business enjoys a long-standing...

  • Page 6
    .... That thinking guided the 2007 merger of CVS and Caremark. Today we're the largest pharmacy health care company in the United States, and our strengths across the spectrum of pharmacy care are helping us deliver savings and improve the plan member experience for PBM clients. I'll have more to...

  • Page 7
    ... that we were able to hire Per Lofberg as our new PBM president. Per, who joined us in January 2010, brings more than 30 years of experience in the health care and PBM industries. Formerly chairman of Merck-Medco Managed Care LLC, which later became Medco Health Solutions, he 2009 Annual Report 3

  • Page 8
    ... him the perfect person to guide our PBM in this evolving health care environment. OUR SAME-STORE SALES GROWTH LEADS ALL PHARMACY RETAILERS our focus on private label, our category mix, and the ExtraCare® card. We have a solid track record at making the most of our acquisitions, roughly doubling...

  • Page 9
    ... continue to offer new and innovative services that help attract and retain PBM and retail customers. For example, we plan to expand pharmacogenomic clinical and testing services for CVS Caremark PBM clients through our ownership stake in Generation Health. We want to improve care for patients who...

  • Page 10
    ... are challenging goals in an environment of ever-rising health care costs, yet CVS Caremark excels at both for our 2,200 clients and 53 million plan members. Our capabilities extend across the entire PBM spectrum, from mail order and specialty pharmacies to extensive clinical programs, unique retail...

  • Page 11
    Pharmacy Benefits Management Our capabilities extend across the entire PBM spectrum, from mail order and specialty pharmacies to extensive clinical programs, unique retail options, and innovative plan designs.

  • Page 12
    ... hepself Nancy does not Medications (50% adhepent) $8,800 Testing supplies (50% adhepent) $9,500 Medications (90% adhepent) $15,800 Testing supplies $15,000 Outpatient and othep medical costs $9,000 $1 invested in diabetes management can save $9 in health cape cost. New meds due to complications...

  • Page 13
    ... Using new and innovative technology, we continually strive to improve our quality standards. RIGHT: At Caremark.com, PBM plan members can check drug costs or refill prescriptions and have them delivered right to their door. The website is a valuable health information resource as well. 2009 Annual...

  • Page 14
    ...Take the new CVS/pharmacy® Health Savings Pass. For just $10 annually, customers can obtain a 90-day prescription for any of more than 400 common generic maintenance medications. The cost is just $9.99 per prescription at their local CVS/pharmacy store. CVS Caremark PBM plan members enjoy access to...

  • Page 15
    Retail Pharmacy Today's CVS/pharmacy locations combine an exceptional frontstore shopping experience with a range of pharmacy and broader health care services that lead to better health outcomes.

  • Page 16
    ... 131 OK NM 6 36 SC AR MS 39 193 AL 150 GA 303 TX 507 LA 90 FL 693 HI 45 *As of Decembep 31, 2009 Same-Stope Sales Gpowth Retail Loyalty Ppogpam 1 TOTAL SAME-STORE SALES GROWTH I ndustry Leader # 9 8 7 6 5 4 3 2 1 0 8.1% 6.3% 5.3% 4.5% 5.0% 2005 2006 2007 2008 2009

  • Page 17
    ...000 retail stores, customers appreciate face-to-face interaction with their CVS pharmacist (left). CVS/pharmacy technicians (top) play a critical role, freeing our pharmacists to spend more time counseling patients on adherence, drug interactions, and opportunities for savings. More than 500 stores...

  • Page 18
    ... or retail pharmacy can on its own. Before the 2007 merger that transformed CVS and Caremark into the nation's largest pharmacy health care provider, Caremark had long established itself as a leading PBM. Its core strengths included generic substitution, mail service, network management, specialty...

  • Page 19
    Integrated Pharmacy Care Through our PBM/retail combination, CVS Caremark offers a variety of unique, value-added services that no standalone PBM can match. Our services help lower costs and improve the plan member experience.

  • Page 20
    ...Automatic Refill 1. New Rx 2. Generic 3. Lapsed Rx IDs Most Effective Communication Mode Mail Prioritizes Opportunities E-mail Pharmacy Text Inbound IVR Customep Cape Outbound IVR MD Communication CVS Capemapk is the CVS CAREMARK TOTAL REVENUE No. 1 PROVIDER OF PRESCRIPTIONS in the nation with...

  • Page 21
    ... a variety of value-added services for our PBM plan members. Many CVS Caremark plan members have the option of picking up their 90-day maintenance prescriptions at one of our stores (left). More than 500 CVS pharmacies include MinuteClinics (center), which now provide monitoring services for common...

  • Page 22
    ... the leaders in the PBM space for a long time now, and today CVS Caremark has the most innovative offering. I think the integrated PBM/retail approach will prove to be the winning model, and I couldn't resist the opportunity to help shape the future of pharmacy care. PER LOFBERG: QUESTION: What have...

  • Page 23
    ... to take a leadership role in utilization management of genomic testing. QUESTION: Larry, we talked about Maintenance Choice and some of the other value-added services you have introduced in the stores that make the plan member experience unique for CVS Caremark clients. Can you also talk about...

  • Page 24
    ...in CVS/pharmacy locations. We have also raised $19 million since 2004 through an annual, in-store campaign to support the newly renovated CVS Caremark Rehabilitation Services Center, which opened in 2009 at St. Jude Children's Research Hospital in Memphis, Tennessee. To learn more about CVS Caremark...

  • Page 25
    2009 Financial Report 2009 Annual Report 21

  • Page 26
    ...company, we believe we can drive value for our customers by effectively managing pharmaceutical costs and improving health care outcomes through our pharmacy benefit management, mail order and specialty pharmacy division, Caremark Pharmacy Services®; approximately 7,000 CVS/pharmacy® retail stores...

  • Page 27
    ... Medicare Part D drug benefit plans. Our Pharmacy Services segment generates net revenues primarily by contracting with clients to provide prescription drugs to plan members. Prescription drugs are dispensed by our mail order pharmacies, specialty pharmacies and national network of retail pharmacies...

  • Page 28
    ... the Caremark Merger. • In addition, our gross profit continued to benefit from the increased utilization of generic drugs (which normally yield a higher gross profit rate than equivalent brand name drugs) in both the Pharmacy Services and Retail Pharmacy segments. Please see the Segment Analysis...

  • Page 29
    ...interest expense increased by $74 million, compared to 2007, due to a combination of higher interest rates and an increase in our average debt balance, which resulted primarily from the borrowings used to fund an accelerated share repurchase program and the Longs Acquisition. 2009 Annual Report 25

  • Page 30
    ...(3) Beginning in 2008, when Pharmacy Services segment clients elect to pick up their maintenance prescriptions at Retail Pharmacy segment stores through the Company's intersegment activities (such as the Maintenance Choice program) instead of receiving them through the mail, both segments record the...

  • Page 31
    ... Mail choice is defined as claims filled at a Pharmacy Services' mail facility, which includes specialty mail claims, as well as 90-day claims filled at retail under the Maintenance Choice program. (6) Pharmacy network is defined as claims filled at retail pharmacies, including CVS/pharmacy stores...

  • Page 32
    ... its national retail pharmacy network transactions based on individual contract terms. Caremark's contracts are predominantly accounted for using the gross method. Prior to April 1, 2009, RxAmerica's contracts were accounted for using the net method. Effective April 1, 2009, we converted a number of...

  • Page 33
    ..., whose retail pharmacy network contracts were accounted for using the net revenue recognition method prior to April 1, 2009, as discussed above; (ii) higher drug costs, which normally result in higher claim revenues, (iii) client pricing, (iv) changes in the percentage of generic drugs dispensed...

  • Page 34
    ..., general and administrative activities and retail specialty pharmacy store and administrative payroll, employee benefits and occupancy costs increased to 1.9% of net revenues in 2009, compared to 1.8% and 2.2% in 2008 and 2007, respectively. As you review our Pharmacy Services segment's performance...

  • Page 35
    ... of the Longs Drug Stores from the acquisition date (October 20, 2008) forward. (3) Same store sales increase includes the Longs Drug Stores beginning in November 2009 and the stores acquired from Albertson's, Inc. beginning in July 2007. Net revenues. As you review our Retail Pharmacy segment...

  • Page 36
    ... 26, 2009. We have reached understandings with most of our commercial thirdparty payors where we participate as pharmacy providers to adjust reimbursements to account for this change in methodology, but most state Medicaid programs that utilize AWP as a pricing reference have not taken action to...

  • Page 37
    ... segment include executive management, corporate relations, legal, compliance, human resources, corporate information technology and finance related costs. Operating expenses increased during 2009 primarily due to higher legal fees associated with increased litigation activity, depreciation and...

  • Page 38
    ... used to fund the special cash dividend paid to Caremark shareholders in connection with the Caremark Merger and was offset, in part, by the repayment of short-term borrowings and the repurchase of common shares. Share repurchase programs. On November 4, 2009, our Board of Directors authorized...

  • Page 39
    ... markets and new store operating lease costs. Quarterly Dividend Increase. On January 12, 2010, the Company's Board of Directors approved a 15% increase in the quarterly dividend on the common stock of the Company to $0.0875 per share. Off-BalanBe Sheet Arrangements In connection with executing...

  • Page 40
    ... and their related useful lives, are derived from established valuation techniques and management estimates. Goodwill represents the excess of amounts paid for acquisitions over the fair market value of the net identifiable assets acquired. We evaluate the recoverability of certain long-lived assets...

  • Page 41
    ... their prescription drug costs and/or increase member co-payments, the continued efforts of competitors to gain market share and consumer spending patterns. The carrying value of goodwill and intangible assets covered by this critical accounting policy was $36 billion as of December 31, 2009. We...

  • Page 42
    ...is stated at the lower of cost or market on a first-in, first-out basis using the retail method of accounting to determine cost of sales and inventory in 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...

  • Page 43
    ... with tax authorities. As of December 31, 2009, the Company had approximately $20 million of unrecognized tax benefits (after considering the federal benefit of state taxes), plus interest, related to business combinations that would have been treated as an adjustment to the purchase price...

  • Page 44
    ... drug utilizations trends, the number of covered lives and the financial health of our PBM clients. Further, interest rate fluctuations and changes in capital market conditions may affect our ability to obtain necessary financing on acceptable terms, our ability to secure suitable store locations...

  • Page 45
    ... planned benefits associated with the Longs Acquisition in accordance with the expected timing; • The continued efforts of health maintenance organizations, managed care organizations, pharmacy benefit management companies and other third-party payors to reduce prescription drug costs and pharmacy...

  • Page 46
    ...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 Disclosure Committee, comprised of management from each functional area within the Company, which performs a separate review...

  • Page 47
    ..., in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of CVS Caremark Corporation as of December 31, 2009 and 2008 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the...

  • Page 48
    ... FisBal Year Ended in millions, except per share amounts Dec. 31, 2009 DeB. 31, 2008 DeB. 29, 2007 Net revenues Cost of revenues Gross profit Operating expenses Operating profit Interest expense, net InBome before inBome tax provision InBome tax provision InBome from Bontinuing operations Loss from...

  • Page 49
    ...Other long-term liabilities Commitments and BontingenBies (Note 12) Redeemable nonBontrolling interest SHAREHOLDERS' EQUITY: $ 3,560 3,075 3,246 315 2,104 12,300 8,756 3,678 1,102 37 $ 3,801 2,814 3,178 3,044 653 13,490 8,057 3,702 1,137 - Preferred stoBk, par value $0.01: 0.1 shares authorized...

  • Page 50
    ...in aBquisition IssuanBe of long-term debt Repayments of long-term debt Dividends paid Derivative settlements ProBeeds from exerBise of stoBk options ExBess tax benefits from stoBk-based Bompensation RepurBhase of Bommon stoBk Net cash provided by (used in) financing activities Net inBrease (deBrease...

  • Page 51
    ...(301) 245 - (56) - - (301) (301) Beginning of year Common stoBk issued for Caremark Merger, net of issuanBe Bosts Conversion of shares held in Trust to treasury stoBk StoBk option aBtivity and stoBk awards Tax benefit on stoBk options and stoBk awards Conversion of preferenBe stoBk End of year See...

  • Page 52
    ... Statements of Shareholders' Equity Shares in millions Dec. 31, 2009 DeB. 31, 2008 DeB. 29, 2007 Dec. 31, 2009 Dollars DeB. 31, 2008 DeB. 29, 2007 ACCUMULATED OTHER COMPREHENSIVE LOSS: Beginning of year Net Bash flow hedges, net of inBome tax Pension liability adjustment, net of inBome tax End of...

  • Page 53
    ...Medicare Part D drug benefit plans. The pharmacy services business generates net revenues primarily by contracting with clients to provide prescription drugs to plan members. Prescription drugs are dispensed by the mail order pharmacies, specialty pharmacies and national network of retail pharmacies...

  • Page 54
    ...third-party providers (e.g., pharmacy benefit managers, insurance companies and governmental agencies) and vendors as well as clients, members and manufacturers. Inventories. Inventories are stated at the lower of cost or market on a first-in, first-out basis using the retail method of accounting to...

  • Page 55
    ... from prescription drugs sold by its mail service pharmacies and under national retail pharmacy network contracts where the PSS is the principal using the gross method at the contract prices negotiated with its clients. Net revenue from the PSS includes: (i) the portion of the price the client pays...

  • Page 56
    ..."Drug Discounts" later in this document), (ii) the price paid to the PSS ("Mail Co-Payments") or a third-party pharmacy in the PSS' national retail pharmacy network ("Retail Co-Payments") by individuals included in its clients' benefit plans and (iii) administrative fees for national retail pharmacy...

  • Page 57
    ... clients' benefit plans from the PSS' mail service pharmacies, net of any volumerelated 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 contracts...

  • Page 58
    ...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 59
    ...with tax authorities. As of December 31, 2009, the Company had approximately $20 million of unrecognized tax benefits (after considering the federal benefit of state taxes), plus interest, related to business combinations that would have been treated as an adjustment to the purchase price allocation...

  • Page 60
    ... per share, of the Company for each share of common stock of Caremark, par value $0.001 per share, issued and outstanding immediately prior to the effective time of the merger. In addition, Caremark shareholders of record as of the close of business on the day immediately preceding the closing date...

  • Page 61
    ... to the acquisition of Generation Health and the finalization of the purchase price allocation in connection with the Longs Acquisition. Indefinitely-lived intangible assets are tested for impairment by comparing the estimated fair value of the asset to its carrying value. The Company estimates the...

  • Page 62
    ... Board of Directors authorized a share repurchase program for up to $5.0 billion of its outstanding common stock. The share repurchase program was completed during 2007 through a $2.5 billion fixed dollar accelerated share repurchase agreement (the "May ASR agreement"), under which final settlement...

  • Page 63
    ... Notes pay interest quarterly and may be redeemed at any time, in whole or in part at a defined redemption price plus accrued interest. The net proceeds from the 2008 Notes were used to fund a portion of the Longs Acquisition. On May 22, 2007, the Company issued $1.75 billion of floating rate senior...

  • Page 64
    ...D The Company offers Medicare Part D benefits through SilverScript and Accendo, which have contracted with CMS to be a PDP and, pursuant to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("MMA"), must be risk-bearing entities regulated under state insurance laws or similar...

  • Page 65
    ... BENEFITS The Company provides postretirement health 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...

  • Page 66
    ... 2.04 years. In 2007, the Board of Directors adopted and shareholders approved the 2007 Incentive Plan. The terms of the 2007 Incentive Plan provide for grants of annual incentive and long-term performance awards to executive officers and other officers and employees of the Company or any subsidiary...

  • Page 67
    ... value of each stock option is estimated using the Black-Scholes Option Pricing Model based on the following assumptions at the time of grant: 2009 2008 2007 Dividend yield (1) ExpeBted volatility (2) Risk-free interest rate (3) ExpeBted life (in years) (4) Weighted Average grant date fair value...

  • Page 68
    ... following table is a summary of the Company's stock option activity for the year-ended December 31, 2009: Weighted Average ExerBise PriBe Weighted Average Remaining ContraBtual Term Aggregate IntrinsiB Value shares in thousands Shares Outstanding at DeBember 31, 2008 Granted ExerBised Forfeited...

  • Page 69
    ... number of state and local tax authorities. Additionally, the Company has filed a Protest with the IRS Appeals Office regarding various assessments made in connection with the IRS examinations of Caremark's consolidated U.S. income tax returns for 2006 and for its short tax year-ended March 22, 2007...

  • Page 70
    ...in this lawsuit are related to the claims and issues pending in the federal qui tam lawsuit described above. In December 2007, the Company received a document subpoena from the Office of Inspector General, United States Department of Health and Human Services ("OIG"), requesting information relating...

  • Page 71
    ... the timing or outcome of any review by the government of such information. 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...

  • Page 72
    ... Services and Retail Pharmacy segments to a new Corporate segment. The Corporate segment consists of costs primarily associated with executive management, corporate relations, legal, compliance, human resources, corporate information technology and finance. This change had no impact on the Company...

  • Page 73
    ...(3) Beginning in 2008, when Pharmacy Services segment clients elect to pick up their maintenance prescriptions at Retail Pharmacy segment stores through the Company's intersegment activities (such as the Maintenance Choice program) instead of receiving them through the mail, both segments record the...

  • Page 74
    ...tax benefit Net inBome available to Bommon shareholders, diluted Denominator for earnings per common share calculation: Weighted average Bommon shares, basiB PreferenBe stoBk StoBk options RestriBted stoBk units Weighted average Bommon shares, diluted Basic earnings per common share...70 CVS Caremark

  • Page 75
    ... a change in our fiscal year-end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect our position in the health care, rather than the retail, industry. The fiscal year change was effective beginning with the fourth of fiscal 2008. 2009 Annual Report 71

  • Page 76
    ... Caremark Rx, L.L.C., continuing as the surviving entity (the "Caremark Merger"). Following the Caremark Merger, the name of the Company was changed to "CVS Caremark Corporation." By virtue of the Caremark Merger, each issued and outstanding share of Caremark common stock, par value $0.001 per share...

  • Page 77
    ...). 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, 2009, based on criteria established in Internal Control - Integrated Framework issued by...

  • Page 78
    ... Group Index, which currently includes 51 health care companies. COMPARISON OF CUMULATIVE TOTAL RETURN TO SHAREHOLDERS December 31, 2004 to December 31, 2009 $250 $200 $150 $100 $50 $0 04 CVS Caremark Corporation 05 S&P 500 06 07 08 09 S&P 500 HealthBare Group Index Compound Annual Return Rate...

  • Page 79
    ...shares of CVS Caremark common stock. The program is sponsored and administered by The Bank of New York Bellon. For more information, including an enrollment form, please contact: The Bank of New York Bellon at (877) 287-7526 FINANCIAL AND OTHER COBPANY INFORBATION The Company's Annual Report on Form...

  • Page 80
    One CVS Drive Woonsocket, RI 02895 (401) 765-1500 info.cvscaremark.com The 2009 CVS Caremark Annual Report saved the following resources by printing on paper containing 10% and 100% postconsumer recycled content. trees waste water energy solid waste greenhouse gases waterborne waste 1,016 fully ...