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CVS Caremark 2010 Annual Report
is this
Two Pharmacists and a Nurse Practitioner
- or -
A Whole New Way to Deliver Pharmacy Services
?

Table of contents

  • Page 1
    is this Two Pharmacists and a Nurse Practitioner - or A Whole New Way to Deliver Pharmacy Services ? CVS Caremark 2010 Annual Report

  • Page 2
    ... health plans, plan sponsors, and their members. CVS Caremark is a market leader in mail order pharmacy, retail pharmacy, specialty pharmacy, and retail clinics, and we are a leading provider of Medicare Part D Prescription Drug Plans. As one of the country's largest pharmacy benefits managers (PBMs...

  • Page 3
    ...09 10 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 are effective and easy for our customers. Our Values ACCOUNTABILITY We take ownership for our actions and the results. RESPECT We treat...

  • Page 4
    ...Do You See CVS Caremark? pome think of us as the nation's leading drugstore chain, wroviding high-quality service and convenience in the wharmacy and front of the store. For others, we're a leading wharmacy benefits manager, imwroving outcomes and controlling costs for clients and wlan members. Both...

  • Page 5
    ...to-face patient counseling on opportunities regarding medication adherence, closing gaps in care, and cost-savings. Through our Pharmacy Advisorâ„¢ program, which became broadly available to PBM clients in January 2011, we're providing these services for diabetic patients. Some clients are seeing 10...

  • Page 6
    ... In addition to providing major savings for payors and patients, generic drugs also provide significantly higher margins for pharmacy providers. As the nation's largest purchaser of pharmaceuticals, CVS Caremark is well-positioned to benefit as approximately $90 billion in branded drugs are expected...

  • Page 7
    ...for years to come and help drive the growth of both our PBM and retail businesses. The graying U.S. population is also likely to drive the Medicare Part D sector. As one of the nation's leading providers of Medicare Part D prescription drug plans and other Medicare Part D services, we see this as an...

  • Page 8
    ... the ability to target our key points of contact-our retail pharmacies, mail order pharmacies, and call centers-this technology helps us encourage patients to remain compliant with prescribed medications and close gaps in care. The result? Better health and lower overall health care costs. - 4 -

  • Page 9
    ... effects, requiring closer communication between pharmacists and patients. Our network of specialty pharmacies leverages a team of specialized clinical pharmacists to support these patients. Through our growing Specialty Guideline Management program, we're also helping PBM clients reduce unnecessary...

  • Page 10
    CVS Caremark 2010 Annual Report is this Kim's DNA Test R esult - or An Exciting Treatment Breakthrough ? We've taken a leadership role in pharmacogenomic testing and clinical services. Through our majority stake in Generation Health, we plan to make genetic benefit management an integral part of ...

  • Page 11
    ... real estate program. In the markets where we operate, 75 percent of the population lives within three miles of a CVS/pharmacy ®. Moreover, we continue to open new locations and relocate others to improve access. Over the next three years, we expect to open approximately 150 net new stores annually...

  • Page 12
    .... With their ExtraCare® Health Cards, our PBM plan members save even more on many CVS brand overthe-counter products. Despite their lower prices, our store brand products provide us with higher margins than their national brand equivalents. That's why we add approximately 900 new items every year...

  • Page 13
    ... to Enjoy Easy Savings - or A Key to More Effective Marketing ? More than 67 million customers use their ExtraCare® card in our stores and online. The largest loyalty program among all retailers, ExtraCare makes it easy for shoppers at our more than 7,100 locations to take advantage of weekly sales...

  • Page 14
    CVS Caremark 2010 Annual Report is this A Convenient MinuteClinic - or Help for a Crowded Health Care System ? Since its inception in 2000, MinuteClinic has treated nearly 9 million patients. The leading provider of retail health care, we now have 560 clinics and counting in CVS/pharmacy locations...

  • Page 15
    ... in Generation Health in 2009, and this offering is now broadly available to clients. Caremark Mail We operate one of the largest mail order pharmacy businesses in the U.S., which provides costeffective, convenient delivery of maintenance medications. CVS Caremark Specialty Pharmacy We operate the...

  • Page 16
    ... M. RYAN (right) Chairman of the Board and Chief Executive Officer LARRY J. MERLO (left) President and Chief Operating Officer Our 2010 Financial Performance and Commitment to Enhancing Shareholder Value 2010 marked a year of substantial progress for our company despite continued challenges in the...

  • Page 17
    ... drug spending. In addition to taking over management of Aetna's retail pharmacy network as well as pharmacy customer and member service functions, CVS Caremark will also handle purchasing, inventory management, and prescription fulfillment for Aetna's mail-order and specialty pharmacy operations...

  • Page 18
    ... benefit from the addition of Universal American's Medicare Advantage Prescription Drug Plan (MA-PD) insurance business beginning in 2011 and to begin servicing the PBM contracts for both the PDP and Universal American's MA-PD business beginning in January 2012. Pharmacy Advisor Utilizes Our Retail...

  • Page 19
    ... savings or health improvement opportunities for PBM plan members whether they interact with us at our retail and specialty pharmacies, through our mail order pharmacies, or using our Web sites. We've made diabetes intervention our initial priority. In the future, Pharmacy Advisor will also address...

  • Page 20
    ... and Chief Executive Officer of CVS Caremark, the Board of Directors wants to thank him for the enormous contributions he has made to the growth and culture of our company over the past 35 years. Tom became President and CEO of CVS in 1994 when the company had approximately 1,200 stores and was...

  • Page 21
    ... U.S. health care market, and we are committed to driving strong growth and returns to shareholders. On behalf of our Board of Directors and our 201,000 devoted associates across the nation, thank you for your continued support. Sincerely, Thomas M. Ryan Chairman of the Board and Chief Executive Of...

  • Page 22
    ... wide range of services from routine medical exams to helping diabetics manage their disease. In Texas, the YWCA will use our support to fund its Women's Health program that provides free mammograms for uninsured or underinsured women. Our CVS/pharmacy in-store fundraising campaigns collected nearly...

  • Page 23
    ...Management's Discpssion and Analysis of Financial Condition and Resplts of Operations Management's Report on Internal Control Over Financial Reporting Report of Independent Registered Ppblic Accopnting Firm Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Cash...

  • Page 24
    ... mail order pharmacy services, specialty pharmacy services, plan design and administration, formulary management and claims processing. Our clients are primarily employers, insurance companies, unions, government employee groups, managed care organizations and other sponsors of health benefit plans...

  • Page 25
    ...sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, photo finishing, seasonal merchandise, greeting cards and convenience foods through our CVS/pharmacy and Longs Drugs® retail stores and online through CVS.com. Our...

  • Page 26
    CVS Caremark 2010 Annual Report Management's Dismussion and Analysis of Finanmial Condition and Results of Operations SUMMARY OF OUR CONSOLIDATED FINANCIAL RESULTS Fiscal Year in millions, except per common share amounts 2010 2009 2008 Net revenues GrJss prJfit Operating expenses Operating ...

  • Page 27
    ...2010 and 2009, respectively. As you review our performance in this area, we believe you should consider the following important information: • During 2010, operating expenses increased as a result of increases in our Corporate segment expenses of $87 million, and an increase in our Retail Pharmacy...

  • Page 28
    ... profit and operating profit that occur when Pharmacy Services segment customers, through the Company's intersegment activities (such as the Maintenance Choice® program), elect to pick up their maintenance prescriptions at Retail Pharmacy segment stores instead of receiving them through the mail...

  • Page 29
    ...network net revenues, claims processed and generic dispensing rates do not include Maintenance Choice, which are included within the mail choice category. (2) Mail choice is defined as claims filled at a Pharmacy Services' mail facility, which includes specialty mail claims, as well as 90-day claims...

  • Page 30
    ... 2009, we converted a number of RxAmerica's retail pharmacy network contracts and a large health plan to the Caremark contract structure, which resulted in those contracts being accounted for using the gross method. As a result, net revenues increased by $1.1 billion during 2010 as compared to 2009...

  • Page 31
    ... renewed a number of existing clients and obtained new clients at lower rates, which resulted in gross profit compression during 2009, and 2010. In addition, market dynamics and regulatory changes have affected our ability to offer plan sponsors pricing terms that include the use of retail network...

  • Page 32
    ... Caremark 2010 Annual Report Management's Dismussion and Analysis of Finanmial Condition and Results of Operations • As discussed previously in this document, we review our network contracts on an individual basis to determine if the related revenues should be accounted for using the gross method...

  • Page 33
    ... new stores and a positive impact related 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: • During 2009, net revenues from the Longs Drug Stores increased net...

  • Page 34
    CVS Caremark 2010 Annual Report Management's Dismussion and Analysis of Finanmial Condition and Results of Operations • Pharmacy revenue dollars continue to be negatively impacted in all years by the conversion of brand named drugs to equivalent generic drugs, which typically have a lower selling...

  • Page 35
    ... did not take action to make similar adjustments. Accordingly, state Medicaid reimbursement was adversely impacted in 2010. Operating expenses in our Retail Pharmacy Segment include store and administrative payroll, employee benefits, store and administrative occupancy costs, selling expenses...

  • Page 36
    ... long-term borrowings used to fund the Longs Acquisition and to retire $353 million of debt assumed as part of the Longs Acquisition. Share repurchase programs - On June 14, 2010, our Board of Directors authorized a new share repurchase program for up to $2.0 billion of our outstanding common stock...

  • Page 37
    ... price plus accrued interest. The net proceeds were used to repay the bridge credit facility, a portion of our outstanding commercial paper borrowings and for general corporate purposes. On July 1, 2009, we issued a $300 million unsecured floating rate senior note due January 30, 2011 (the "2009...

  • Page 38
    ... capital markets and new store operating lease costs. Quarterly Dividend Increase - In January 2010, our Board of Directors authorized a 15% increase in our quarterly common stock dividend to $0.0875 per share. This increase equates to an annual dividend rate of $0.35 per share. On January 11, 2011...

  • Page 39
    ...5,266 $ 5,721 (1) Interest payments on long-term debt are calculated on outstanding balances and interest rates in effect on December 31, 2010. Critical Accopnting Policies We prepare our consolidated financial statements in conformity with generally accepted accounting principles, which require...

  • Page 40
    ... from our revenues pricing guarantees and guarantees regarding the level of service we will provide to the client or member as well as other payments made to our clients. We participate in the Federal Government's Medicare Part D program as a Prescription Drug Plan ("PDP"). Our net revenues include...

  • Page 41
    ...in each store and a continuous cycle count process is the primary procedure used to validate the inventory balances on hand in each distribution center and mail facility to ensure that the amounts reflected in the accompanying consolidated financial statements are properly stated. The accounting for...

  • Page 42
    CVS Caremark 2010 Annual Report Management's Dismussion and Analysis of Finanmial Condition and Results of Operations Our total reserve for estimated inventory losses covered by this critical accounting policy was $120 million as of December 31, 2010. Although we believe we have sufficient current ...

  • Page 43
    ... organizations to reduce 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 other intangible assets covered by this critical accounting policy was $25.7 billion...

  • Page 44
    CVS Caremark 2010 Annual Report Management's Dismussion and Analysis of Finanmial Condition and Results of Operations Our total closed store lease liability covered by this critical accounting policy was $451 million as of December 31, 2010. This amount is net of $288 million of estimated sublease ...

  • Page 45
    ... earnings or adjusted earnings per common share growth, free cash flow, debt ratings, inventory levels, inventory turn and loss rates, store development, relocations and new market entries, as well as statements expressing optimism or pessimism about future operating results or events, are forward...

  • Page 46
    ..., 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 and/or the failure to win new client business...

  • Page 47
    ...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 48
    ... over financial reporting as of December 31, 2010, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CVS Caremark Corporation as of December 31, 2010 and 2009 and...

  • Page 49
    ... share amounts 2010 2009 2008 Net revenues CJst Jf revenues GrJss prJfit Operating expenses Operating prJfit Interest expense, net IncJme befJre incJme tax prJvisiJn IncJme tax prJvisiJn IncJme frJm cJntinuing JperatiJns LJss frJm discJntinued JperatiJns, net Jf incJme tax benefit Net incJme Net...

  • Page 50
    CVS Caremark 2010 Annual Report Consolidated Balanme Sheets December 31, in millions, except per share amounts 2010 2009 Assets: Cash and cash equivalents ShJrt-term investments AccJunts receivable, net InventJries Deferred incJme taxes Other current assets TJtal current assets PrJperty and ...

  • Page 51
    ... millions 2010 2009 2008 Cash flJws frJm Jperating activities: Cash receipts frJm revenues Cash paid fJr inventJry and prescriptiJns dispensed by retail netwJrk pharmacies Cash paid tJ Jther suppliers and emplJyees Interest and dividends received Interest paid IncJme taxes paid Net cash prJvided...

  • Page 52
    CVS Caremark 2010 Annual Report Consolidated Statements of Shareholders' Equity Shares Year Ended December 31, in millions DJllars Year Ended December 31, 2010 2009 2008 2008 2010 2009 Preference stJck: Beginning Jf year CJnversiJn tJ cJmmJn stJck End Jf year CJmmJn stJck: Beginning Jf year ...

  • Page 53
    Consolidated Statements of Shareholders' Equity Shares Year Ended December 31, in millions DJllars Year Ended December 31, 2010 2009 2008 2008 2010 2009 Retained earnings: Beginning Jf year Net incJme (excludes net lJss attributable tJ nJncJntrJlling interest Jf $3 in 2010) CJmmJn stJck ...

  • Page 54
    ... mail order pharmacy services, specialty pharmacy services, plan design and administration, formulary management and claims processing. The Company's clients are primarily employers, insurance companies, unions, government employee groups, managed care organizations and other sponsors of health...

  • Page 55
    ... financial instruments as of December 31, 2010 and 2009. Accounts receivable - Accounts receivable are stated net of an allowance for doubtful accounts. The accounts receivable balance primarily includes trade amounts due from third party providers (e.g., pharmacy benefit managers, insurance...

  • Page 56
    ...mail service and specialty pharmacies and the cost method of accounting on a first-in, first-out basis to determine inventory in the Company's distribution centers. Physical inventory counts are taken on a regular basis in each store and a continuous cycle count process is the primary procedure used...

  • Page 57
    ... from prescription drugs sold by its mail service pharmacies and under 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 directly...

  • Page 58
    ... in clients' 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' retail pharmacy network under contracts where...

  • Page 59
    ... include reported claims and claims incurred but not reported, are calculated using standard insurance industry actuarial assumptions and the Company's historical claims experience. Facility opening and closing costs - New facility opening costs, other than capital expenditures, are charged directly...

  • Page 60
    ...) using the straight-line method. Stock-based compensation costs are included in selling, general and administrative expenses. Income taxes - The Company provides for federal and state income taxes currently payable, as well as for those deferred because of timing differences between reported income...

  • Page 61
    ... federal benefit of state taxes), plus interest, related to business combinations that would have been treated as an adjustment to the purchase price allocation if they would have been recognized under the previous business combination guidance. In June 2009, the Financial Accounting Standards Board...

  • Page 62
    ... 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 of operations and cash flows include the Longs Acquisition beginning October 20, 2008. Effective December 30, 2009, the Company...

  • Page 63
    ...'s Board of Directors authorized a new share repurchase program for up to $2.0 billion of outstanding common stock (the "2010 Repurchase Program"). The share repurchase authorization, which was effective immediately and expires at the end of 2011, permits the Company to effect repurchases from time...

  • Page 64
    ... 2009 Notes pay interest semi-annually and may be redeemed, in whole or in part, at a defined redemption price plus accrued interest. The net proceeds were used to repay the bridge credit facility, a portion of the Company's outstanding commercial paper borrowings and for general corporate purposes...

  • Page 65
    ... 31, 2010 are $1.1 billion in 2011, $2 million in 2012, $1 million in 2013, $550 million in 2014, and $550 million in 2015. 6: LEASES The Company leases most of its retail and mail order locations, ten of its distribution centers and certain corporate offices under noncancelable operating leases...

  • Page 66
    ...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 67
    ... 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, 2010 and 2009, the Company...

  • Page 68
    ... payment from the employee. Compensation cost is recorded based on the market price on the grant date and is recognized on a straight-line basis over the requisite service period. In May 2010, the Company's Board of Directors adopted and the shareholders approved the 2010 Incentive Compensation Plan...

  • Page 69
    Following approval and adoption of the 2010 ICP, no new grants can be made under the 1997 ICP. The 2010 ICP is the only compensation plan under which the Company grants stock options, restricted stock and other stock-based awards to its employees, with the exception of the Company's 2007 ESPP. As of...

  • Page 70
    CVS Caremark 2010 Annual Report Notes to Consolidated Finanmial Statements The following table is a summary of the Company's stock option activity for the year ended December 31, 2010: Weighted Average Exercise Price Weighted Average Remaining CJntractual Term Aggregate Intrinsic Value shares in ...

  • Page 71
    ...up to approximately $24 million. During 2010, the Internal Revenue Service (the "IRS") completed an examination of the Company's 2009 consolidated U.S. income tax return pursuant to the Compliance Assurance Process ("CAP") program. The CAP program is a voluntary program under which taxpayers seek to...

  • Page 72
    ...of PBM clients. The claims and issues raised in this lawsuit are related to the claims and issues pending in the federal qui tam lawsuit described previously. In December 2007, the Company received a document subpoena from the Office of Inspector General, United States Department of Health and Human...

  • Page 73
    ... health care costs and expand consumer choice) are being conducted in compliance with the antitrust laws. In March 2009, the Company received a subpoena from the OIG requesting information concerning the Medicare Part D prescription drug plans of RxAmerica, the PBM subsidiary of Longs Drug Stores...

  • Page 74
    ... 2010, the Company received a subpoena from the OIG requesting information about programs under which the Company has offered customers remuneration conditioned upon the transfer of prescriptions for drugs or medications to our pharmacies in the form of gift cards, cash, non-prescription merchandise...

  • Page 75
    ..., gross profit and operating profit that occur when Pharmacy Services segment clients, through the Company's intersegment activities (such as the Maintenance Choice program), elect to pick up their maintenance prescriptions at Retail Pharmacy segment stores instead of receiving them through the mail...

  • Page 76
    ... except per share amounts 2010 2009 2008 NumeratJr fJr earnings per cJmmJn share calculatiJn: IncJme frJm cJntinuing JperatiJns Net lJss attributable tJ nJncJntrJlling interest Preference dividends, net Jf incJme tax benefit IncJme frJm cJntinuing JperatiJns attributable tJ CVS Caremark, basic LJss...

  • Page 77
    ... CVS Caremark Dilpted Earnings per common share: Income from continping operations attribptable to CVS Caremark Loss from discontinped operations attribptable to CVS Caremark Net income attribptable to CVS Caremark Dividends per common share Stock price: (New York Stock Exchange) High Low 2009: Net...

  • Page 78
    CVS Caremark 2010 Annual Report Five-Year Finanmial Summary in millions, except per share amounts 2010 (1) 2009 (1) 2008 (1) 2007 (1) (2) 2006 (1) Statement Jf JperatiJns data: Net revenues GrJss prJfit Operating expenses (3) Operating prJfit Interest expense, net IncJme tax prJvisiJn (5) (4) $ ...

  • Page 79
    ...Ammounting Firm The Board of Directors and Shareholders CVS Caremark Corporation We have audited the accompanying consolidated balance sheets of CVS Caremark Corporation as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders' equity, and cash flows for each...

  • Page 80
    ... companies. COMPARISON OF CUMULATIVE TOTAL RETURN TO SHAREHOLDERS December 31, 2005 to December 31, 2010 $160 $140 $120 $100 $80 $60 $40 $20 $0 2005 CVS Caremark Corporation S&P 500 2006 2007 2008 2009 2010 S&P 500 Food & Staples Retail Group Index S&P 500 Healthcare Group Index Annual Return Rate...

  • Page 81
    ... contact: The Bank of New York Mellon at (877) 287-7526 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: Nancy R. Christal Senior Vice President - Investor Relations CVS Caremark Corporation...

  • Page 82
    One CVS Drive Woonsocket, RI 02895 401.765.1500 info.cvscaremark.com