[email protected]] CVS Health (CVS) September … · Through the above service, CVS helps clients in designing ... Improvement, and Modernization ... prescriptions at CVS Pharmacy

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The Henry Fund

Henry B. Tippie College of Business Venkat Ravichandran [[email protected]] CVS Health (CVS) September 18, 2017 Pharmaceuticals Consumer Staples Stock Rating HOLD

Investment Thesis Target Price $82-$85 We have a hold rating on CVS with a target price of $82-$85 according to the DCF model. CVS has the second highest market share in the Pharmacy Benefit Management and pharmacy retail space, and commands significant bargaining power with health insurers, other PBMs and pharmacies. Drivers of Thesis We expect a CAGR of 5% for EPS, dividend growth of 15% and a dividend

yield of >2% in the subsequent years.

Revenue and Net Profit are estimated to have a CAGR of 5% going forward mainly driven by higher growth in the Pharmacy Services segment.

CVS repurchased 45mln shares in 2016 and is expected to return $3B to its

shareholders through buybacks in 2017.

With $4B in cash and $25B in LT debt, CVS can afford to purchase a health insurer of the size of Aetna with debt and still have Debt/Equity close to 1.

Risks to Thesis Expected loss of 40M1 prescriptions due to the termination of Prime

Therapeutics and Tricare deals may have ripple effects in front-store sales. With Prime Therapeutics on its side and addition of around 2,000 stores

through Rite Aid acquisition16, Walgreens is becoming a formidable rival in the PBM space as well.

Amazons entry may become a reality soon and it may disrupt the entire

structure and pricing points forcing CVS to suffer loss of margins. (Source: FACTSET, Yahoo Finance, Companys 10K)

Henry Fund DCF $87.16 Henry Fund DDM $160.01 Relative Multiple $78.72 Price Data Current Price $83.17 52wk Range $69.30 $90.85 Consensus 1yr Target $88.62 Key Statistics Market Cap (B) $84.55 Shares Outstanding (M) 1,017 Institutional Ownership 84.80% Five Year Beta 0.60 Dividend Yield 2.40% Est. 5yr Growth 12.0% Price/Earnings (TTM) 16.10 Price/Earnings (FY1) 17.10 Price/Sales (TTM) 0.48 Price/Book (mrq) 2.27 Profitability Operating Margin 5.99% Profit Margin 2.98% Return on Assets (TTM) 5.63% Return on Equity (TTM) 14.29%

(Source: FACTSET, Yahoo Finance)

Earnings Estimates Year 2014 2015 2016 2017E 2018E 2019E EPS $4.07 $4.76 $5.01 $4.65 $4.99 $4.97

growth 1.13% 12.77% 1.53% -7.14% 7.33% -0.42% 12 Month Performance Company Description

CVS Health is a pharmaceutical company headquartered in Woonsocket, Rhode Island. The company has 9986 stores across 49 states (only Infusion and Enteral services in Wyoming) in the US and in Brazil as of December 31, 2016. CVS has two major reportable segments namely Pharmacy Services and Retail/Long Term Care. Pharmacy Services includes the Pharmacy Benefit Management business and Retail/LTC is further segmented into Beauty/Cosmetics, OTC/Personal Care and General Merchandise and Other1.

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EXECUTIVE SUMMARY

With a price target of $85 through DCF valuation, we have a hold rating for CVS. Though loss of Prime Therapeutics, Tricare, and FEP businesses will result in a decline of more than 40M prescriptions in the near term, we estimate that CVS should leverage its in-house PBM and pharmacy network, and its relationship with Aetna to its advantage.

CVS is strongly entrenched in the pharmacy business and offers clinical/add-on services in addition to its retail business, a business model that will guard CVS against significant loss of revenue in case of Amazons entry. So CVS is conveniently positioned to defend its market share and grow as well through innovation and more comprehensive care services.

COMPANY DESCRIPTION

CVS Health is a pharmaceutical company headquartered in Woonsocket, Rhode Island. The company has 9986 stores1 across 49 states (only Infusion and Enteral services in Wyoming) in the US and in Brazil as of December 31, 2016.

The company reports under two major segments namely Retail Pharmacy and Pharmacy Services. Under Retail Pharmacy, 75% of the revenue is from the sale of Prescription Drugs and 25% is from the other three sub-segments namely General Merchandise & Other, OTC and Personal Care and Beauty/Cosmetics. Overall, the retail segment contributes 46% of the total revenues with 55% coming from Pharmacy Services or PBM as shows in the chart below.

Pharmacy Services The offerings in this segment are more related to the Pharmacy Benefits Manager CVS Caremark. The following

are a brief description of the major services that CVS offers under this segment. Plan Design Offerings Through the above service, CVS helps clients in designing drug plans that satisfy the requirements of the employees drug requirements. Formulary Management Formulary is the list of drugs authorized for a clients employees/members. Inclusion of a drug in the formulary is done with the help of an independent panel of doctors, pharmacists and other medical experts. There are several templates of the formularies comprising of a proper mix of generic and branded drugs. The client chooses one of these templates for its employees1. Medicare Part D Services CVS offers its PBM services in Medicare program under Part D of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA). Through this service, CVS provides PBM services the plan members qualified for Medicare Part D prescription drug plans (PDP) or Medicare Advantage prescription drug plan (MA-PD). SilverScript, a PDP under CVS contracts with the Centers for Medicare and Medicaid Services (CMS)1. Mail Order Pharmacy Under this service, CVS provides its plan members with mail order pharmacy services where the members can get their monthly medications over mail. CVS also offers Maintenance Choice, a program in which plan members in most states can elect to fill their maintenance prescriptions at CVS Pharmacy retail stores for the same price as mail order. Maintenance Choice also offers its clients the benefit of filling 90-day prescriptions to avoid frequent ordering1. Specialty Pharmacy Specialty pharmacy segment serves individuals who require complex and expensive drug therapies. These are used to provide assistance to members with chronic or genetic diseases and disorders. These stores operate under the CarePlus CVS Pharmacy and Navarro Health Services, and Coram LLC brands. Specialty Connect product is a combination of specialty pharmacy mail and retail capabilities providing members with disease-state specific counseling and sale of medicines through CVS Pharmacy network. Additionally, with the acquisition of

PBM54%

Reta il Pharmacy46%

Revenue Share of Segments

Omnicare in 2015, CVS expanded its footprint in specialty pharmacy and Long Term Care1. Retail Pharmacy Network Management To service its PBM clients, CVS has contracts with a national network of more than 68,000 retail pharmacies which includes 41,000 chain pharmacies and 27,000 stand-alone pharmacies. This includes services such as verifying clinical appropriateness of the drug for the member taking into account the members specific list of drug intake and disease state. Furthermore, the PBM ensures that the dispensed drug is included in the authorized formulary in order for hassle-free payment to the pharmacy-1. Clinical Services CVS also offers clinical programs and services to help its clients manage overall pharmacy and health care costs. The programs are designed to promote good health outcomes by targeting inappropriate utilization and non-adherence to medications1. Medical Pharmacy Management CVS NovoLogix is an online preauthorization tool that helps in cost savings opportunities for specialty drugs and also aids in appropriate drug usage1. The basis of revenue for the PBM business is from two components. The first component is the spread between the rates that PBM charges the employer/member and the price that the PBM pays the pharmacy. The key relationships that need to be considered in this segment of business are that between the Health Insurer/employer and the PBM, and the one between pharmacies and the PBM. In the past and present, CVS has had contracts with major insurance providers such as Anthem, United Health, Wellmark Blue Cross Blue Shield, etc4. Through a bidding process, the insurance providers select those PBMs which are favorable in terms of the pricing structure. In certain scenarios, there are strategic partnerships between PBMs and the health insurers or the health insurer may have a captive PBM under its own parent organization. With regards to pharmacies, CVS has its own network of pharmacy consisting of 9700 retail stores (including the ones inside Target). Caremark also has contracts with a much wider network of around 68,000 pharmacies that include rivals like Walmart, Walgreens, etc. Hence the allocation of contracts to the PBMs happens through a bidding process in which price and strategic relationships are two main factors of consideration.

The second component is the rebate that the CVS gets from drug manufacturers for including the drug in its formulary. Though the PBMs pass-on the benefits from rebate to the insurance provider or plan sponsor, the retention of these rebates also serves as one component of revenue for the PBM4.

(Source: Companys 10K, Bloomberg and model projections)

Above graph shows the historical and predicted revenue for the Pharmacy Services segment excluding intersegment eliminations. In 2016, this segment had a revenue of $119.6B (including intersegment eliminations) occupying 68% of the total revenue. If intersegment eliminations are excluded, the revenue sums to $96.4B and occupies a share of 55% in total revenue1. From now onwards, all the calculations exclude the intersegment eliminations.


This segment had a 19% growth in 2016 from a revenue of $81.3B in 2015. The Pharmacy Services segment had a gross profit of $5.1B with a gross profit margin of 5.31%. Since 2007, the average gross profit margin is 7% with a consistent decline from 6% in 2013 to 5.3% in 20162. Going ahead, we believe the margin will increase gradually from 5.3% in 2017 to a continuing value of 7% in 2024.

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PBM Gross Profit Margin


The revenue of this segment is directly proportional to the number of claims processed for its members (shown in the above graph) and average revenue per claim. Caremark processed 1.2B1 claims for around 90M network members3 with an average of 13 claims per member. Since most of the claims are on a monthly basis, this brings us to an understanding that the members who fill their prescriptions in CVS have year-long medications with an average refill of one every month. The total number of claims processed growth is sporadic with a jump in times of new contracts with major health insurers. Otherwise, the growth is mainly driven by the contracts that Caremark makes with individual employers. This business is generally of higher margins and lower volume when compared to the health plan business1. However, the employer-based business has better reliability of revenues as employers usually sign contract with a single PBM at a time whereas the insurance providers employ more than one PBM at a given point of time. Since 2011, the claims processed growth has a geometric mean of around 13% as CVS was successful in forming contracts with major health insurers such as Express Scripts, Prime Therapeutics, Anthem, Aetna (11% of total PBM revenue in 2016). In 2016, claims processed grew at 21.6%. As the claims processed is a direct function of members covered, we have modeled the claims processed growth at 4% in the short-term and have gradually increased it to a continuing value of 6% per year.


Revenue per claim averages to $71 since 2010 with a value of $78 in 201614. The revenue per claim is largely driven by the formulary (list of authorized drugs) that the PBM provides the employer. For generic drugs, the PBMs price the drugs to the employer and the pharmacy based on the Maximum Allowable Cost (MAC) list. The MAC list is generated by the PBM and the PBM reserves rights to change the prices it pays to the pharmacies from time to time17. Moreover, the price that PBMs charge the employers usually differ from the prices mentioned in the MAC list. Since the PBM has complete discretion over the pricing of these generic drugs, it is common for the PBMs to have higher margins (in percentage) for generic drugs compared to brand-name drugs. Branded drugs have a better pricing structure that involves Average Wholesale Price (AWP). AWP is more transparent and uniform across the entire pharmaceutical market18. Hence there is lesser discretion of the PBM involved in determining the prices of brand-name drugs thereby earning a lesser margin on these drugs. Hence revenue per claim is high for brand-name drugs whereas PBMs encourage generic drugs in their formularies. These are the mechanics that impact the overall revenue from all the claims processed. Due to the increasing prevalence of generic drugs, we expect the revenue per claim to decrease by 2% in 2017, stay constant in 2018 and grow by 2% from 2019 onwards.

Retail / LTC Segment

The retail pharmacy segment includes 9,709 retail stores that encompass 7,980 stand-alone pharmacy stores and 1,674 stores within Target that CVS acquired in 2015. As shown in the following diagram, 75% of the products that the store sells is prescription drugs with 11%, 10% and 4%

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from General Merchandise, OTC/Personal Care and Beauty/Cosmetics respectively.

(Source: Companys 10K) Prescription Drugs: The revenue from this sub-segment is mainly driven by the number of prescriptions that a store fills and revenue per prescription filled. Furthermore, the overall revenue is also dependent on the number of stores in existence as a constant number of prescriptions per store with an increasing number of stores still contributes to an overall increase in revenue.


The above chart shows the number of prescriptions filled per store. In 2016, each store filled 126,000 prescriptions which resulted in an overall number of prescriptions of 1,223,5001 across all the stores. As we can see from the graph above, the variability is within a range of ~25,000 prescriptions per store. The number of prescriptions filled is in direct positive correlation with the number of contracts that CVS pharmacy has with the PBMs. Exclusive

contracts with a PBM have a higher inflow of new prescriptions compared to having non-exclusive ones such as the contract that CVS and Walgreens have with OptumRx6. Concentration of stores in places where the PBMs clients are located also serves as an advantage to the stores. As a result, CVS is in the process of closing down some of its stores in the Mid-West after the loss of Prime Therapeutics contract and focusing more in the southern states. Hence we expect the number of prescriptions per store to decline to 120K in 2017, and increase to 125K by 2019 and stay constant.


The graph above shows the revenue per prescription filled in a CVS store. As it is evident, the revenue per prescription has declined from $54 in 2010 to $50 in 20161. The trend is predominantly attributed to a shift towards generics compared to brand-name drugs. We believe that due to this shift, the revenue per prescription will stay constant till 2018 and gradually increase to a growth rate of 2% by 2024.

OTC and Personal Care, General Merchandise and Other, and Beauty/Cosmetics:

The following graph shows the revenues of the other sub-segments under Retail/LTC category that account for 25% of the segment revenues.

Prescription Drugs75%

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11%

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Beauty/Cosmetics4%

Revenue Decomposition of Retail/LTC

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Number of Prescriptions Filled per store (in M)

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Together, these are categorized as front-store revenue. A key component of the strategy is the ExtraCare card program which is being used to build a loyal customer base through targeted marketing and other benefits including the ExtraBucks rewards. CVS attempts to draw more customers through exclusive brand offerings available only in CVS stores. CVS currently carries 7,000 CVS Pharmacy and proprietary brand products, which accounted for 23% of the front store revenue during 20163. Revenue per store of General Merchandise was 0.90M in 2016 and grew at a rate of 3.06%. Going ahead, we have modeled an increase of 3-4% per year and settle at a long term growth rate of 2% by 2024. OTC and personal care had a revenue per store of $0.84M in 2016. In the short term, we expect the revenue per store of this category to grow at 2.5% and settle at a long-term growth rate of 2%. The Beauty/Cosmetics category had a revenue per store of $0.35M with a growth of 4.21%. Going ahead, we expect this category to grow at 3%, reach a peak of 4% in 2019 and settle at a long term growth rate of 2% in 2024.

MinuteClinic As of December 31, 2016, CVS operated 1,139 MinuteClinic locations that includes seven new clinics opened during 2016. The clinics are staffed by nurse practitioners and physician assistants who utilize nationally established guidelines to diagnose and treat minor health conditions, perform health screenings, monitor chronic conditions, provide wellness services and deliver vaccinations. These clinics are a strategic fit to the business model of CVS as it expands the array of offerings that CVS has for the PBMs including its own CVS Caremark. The clinics specialize in providing cost-effective care

thereby eliminating the need to visit expensive care centers such as hospitals for less-serious medical conditions or regular screenings. As a result, visits paid for by employers, health insurers or other third parties accounted for approximately 91% of MinuteClinics total revenues in 2016. MinuteClinic is now affiliated with more than 70 major health systems and continues to build a platform that supports primary care. Long-term Care CVS acquired Omnicare in 2015, a network of 143 hub and spoke pharmacies specializing in Long-term Care. Omnicare provides distribution of pharmaceuticals, related pharmacy consulting and other ancillary services to chronic care facilities and other care settings. LTCs customers consist of skilled nursing facilities, assisted living facilities, independent living communities, hospitals, correctional facilities, and other health care service providers.

RECENT DEVELOPMENTS

Loss of Tricare and Prime Therapeutics

Prime Therapeutics is a confederation of 17 Blue Cross Blue Shield plans with 20M members19. In 2016, Prime Therapeutics, announced a partnership with Walgreens which will result in a loss of 20M members for CVS. Apart from a loss of prescription drugs, CVS also loses the front-store sales that these customers brought along. Tricare is the health insurer for the uniformed service members and is being managed by the Defense Health Agency. Express Scripts is the PBM for Tricare. ESRX announced in October 2016 that it is replacing CVS with Walgreens as the pharmacy network for their members. This meant a loss of 9.4M members that Tricare services. As a result of these two losses, CVS is expected to lose 40M prescriptions3, which we have accounted for in our model. When compared to 1.2B prescriptions, this loss accounts for around 3% of the total prescription drug revenue.

OptumRx Deal

OptumRx is the PBM owned by United Health20. Recently, CVS signed a deal with OptumRx to provide 90-day prescription refills to OptumRxs members through its Maintenance Choice program. The fact that United Health is the largest US health insurer and a deal with its PBM sounds convincing, the deal is not exclusive and Walgreens

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General Merchandise & Other OTC & Personal Care

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is in a contract as well. Hence this boils down to cost and network penetration of the pharmacy stores instead of a confirmed rise in prescriptions filled.

Cigna Collaboration

Similar to the OptumRx deal, CVS announced a collaboration with Cigna that offers 90-day refills at CVS pharmacy, CVS discount cards and discounts in CVS MinuteClinics for members of Cigna. As Cigna has previously been exclusive with Walmart and Kroger, the deal is clearly beneficial for CVS. We have accounted this effect in our model through the rise of prescription volume.

Partnership with Aetna

The relationship between Aetna and CVS looked a bit strained when Aetna announced its acquisition of Humana. The deal was expected to give Aetna its own PBM. Since the failure of this deal, the relationship between Aetna and CVS has been growing stronger as CVS provides the vertical integration of PBM and pharmacy network to Aetna, a health insurer.

Overlap of CVS and Aetna Presence

(Source: Needham report CVS3)

The above map shows the overlap between Aetna and CVS. The presence of Aetna is indicated by the highlighted states. It can be seen that CVS has a considerable number of stores in those states where Aetna is present (except Arkansas and a few north-eastern states). We have taken into account this effect while determining the number of prescriptions.

Renewal of Anthem Contract

Anthem is the second largest insurer in the US and a part of the Blue Cross Blue Shield confederation21. Anthem has close to 40M members with revenue of $89B22. Express Scripts has been the PBM for Anthem and the contract ends in December 2019. Hence the new contract begins from 2020 and the complete benefits of the contract, estimated to be $1B in EBITDA should be realized in FY 2020. Since Express Scripts is out of the game, the other two major PBMs involved in the race are OptumRx and CVS Caremark. It is logical to assume that Anthem will not be convenient in letting its largest rival United Healths PBM OptumRx handle the pharmacy benefit management part of Anthem. So the logical conclusion may have been CVS Caremark. However, with the latest announcement of Walgreens and Prime Therapeutics JV, there is a significant chance for the new collaboration to win the deal. Since Prime Therapeutics is also a part of the Blue Cross Blue Shield family, even the loss of an exclusivity in the contract can be detrimental to CVS. The following graph shows the overlap of Anthem and CVS. The predicted outcome has not been accounted for in the model.

Overlap of CVS and Anthem Presence

Source: Needham Research Report on CVS

Loss of Federal Employee Health Benefit Plan

Earlier in 2016, the government awarded the Federal Employee Health Benefit plan specialty pharmacy contract to Walgreens/Prime Therapeutics from CVS. This resulted in a loss of 5.4M members and $2.4B in annual revenues7. This jeopardized the more profitable mail order and pharmacy business of FEP. CVS was successful in extending

this contract for one more year through 20191. Though there is no imminent threat of loss of this contract, it is important for CVS to make-up for this loss of members and claims by the beginning of 2020.

Second Quarter Earnings

CVS reported its second quarter earnings on August 08, 2017. Revenues increased by 4.5% on a year-on-year basis and free cash flows were $1.6B during the quarter and $4.6B year-to-date. EPS guidance for the fiscal year was narrowed to $5.83-$5.93 from $5.77-$5.93. The company also announced that it successfully completed 70% of client renewals and the retention rate was 97%.

INDUSTRY TRENDS

Acquisitions and Vertical Integration

There are three components to the pharmaceutical industry on the management and retail side. The first component is the health insurer who provides a comprehensive health insurance package to the employer. The insurer then employs a PBM, the second component, to manage the prescription drug part of the business. The role of the PBM is to minimize the cost of drugs for the employer/plan sponsor and the insurer with economies of scale. Due to the significant number of members that a PBM can divert towards a pharmacy, the third component, the PBMs exert significant influence on the choice of drugs consumed by its members. With this unique leverage, PBMs are able to successfully negotiate with the drug manufacturers as well as pharmacies in order to pocket the benefits obtained from reduction in prices. Due to the huge money and significant influence involved, the margins are significantly high thereby attracting other participants of the market to replicate the PBM model and take a share of the profit pie. As a result, almost all the big players in this market have been eyeing at acquisitions to either expand or integrate vertically. The deal between Walgreens and Prime Therapeutics is one such example of vertical integration of a PBM and pharmacy network. United Health and OptumRx is an example of integration of a health insurer and a PBM. Companies such as CVS have their own PBM. Walgreens is in talks to acquire Rite Aid network of pharmacies which also includes its PBM called EnvisionRx16. Hence we expect CVS to acquire a health insurer of the size of Humana with debt, which will certainly increase the leverage of CVS given the fact that CVS has $3.4B cash currently. Though we have not

modeled it now, we believe this is a catalyst for growth and a path towards creating captive members. However, the cost of debt and stability in cash flows created by the acquisition will dictate the intrinsic value of CVS in such a scenario.

Suspected Entry of Amazon

The speculation of Amazons entry into the pharma space gained traction as the market saw high level recruitment to manage the companys pharmacy operations. Then came the hiring of Mark Lyons, an industry expert with ~15 years of experience in Premera Blue Cross Blue Shield23. With Amazons acquisition of WholeFoods, Amazons retail presence in the brick-and-mortar segment is noteworthy. However, when compared to the number of stores in the network of CVS (around 9,000) and Walgreens (around 12,000), Amazons influence may not be significant. However, Amazon may win over the other two companies in the mail order segment. But the fact remains that mail order pharmacy is just 15% of CVSs total revenue. The impact of Amazon can be judged only after its entry in the pharmaceutical space and the rate of adaptation of people to mail order pharmacy.

With the acquisition of Rite Aid by Walgreens in trouble, Amazon could target the acquisition of Rite Aids pharmacy network that consists of around 2,000 stores. If this happens, then Amazon will turn into a considerable threat to CVS and Walgreens.

Health Transformation Alliance

Health Transformation Alliance is a group of 38 large employers / US based corporations that negotiate collectively with the PBMs. They have announced to direct their members PBM businesses to CVS Caremark and United Healths OptumRx. Participation in the HTA is voluntary and is being done to enhance the power of collective bargaining and ensure transparency in the pricing structure. We believe the pricing pressure may have a negative impact on revenue per claim in PBM space.

Rise of Blink Health and GoodRx

With decreasing transparency in pricing of drugs by the PBMs, new companies are on the rise which leverage the imbalanced pricing structure to reduce the drug prices and still earn a profit. Blink Health is one such online drug

retailer which enables people to pay for the drugs online and collect them from a nearby pharmacy. Blink Health is accepted in around 68,000 pharmacies24. Blink Health is useful for those members who have a high copay or high deductible so that the reduction in the price of drug significantly reduces the out-of-pocket expenses for the member. For example, Lipitor, a generic drug that is priced around $167 in a regular pharmacy has a price tag of under $1025 in Blink Health. For a member with a deductible of $1000, going to Blink Health makes sense. However, there is one problem associated with Blink Health for those people in the donut hole. The donut hole denotes that range of expenditure in a persons health insurance in which the charges are not covered by the insurer. The coverage resumes only when the person crosses the maximum payable and moves out of the donut hole. However, as the purchases in Blink Health do not involve the health insurers plan, all the expenses made by the person in Blink Health while in the donut hole does not help the person to get out of the hole soon. As a result, the person gets to stay in the donut hole though he/she may have crossed it had the payments been made through the insurer instead of the direct purchase from Blink Health.

Diabetes Rate in US

(Source: Statista Dossier Diseases13)

Diabetes is one of the most important diseases under consideration as it has the potential to create customers for an entire lifetime. Due to its non-curable nature and with more awareness about effective management of diabetes, it serves as an important factor of revenue. As shown in the previous graph, the number of people diagnosed with diabetes has almost doubled from 12M in 2000 to 23M in 201527.

Total Cases of Diabetes in US

(Source: American Diabetes Association27)

Moreover, according to the graph above which shows the total number of cases diagnosed with diabetes in different age groups from 1994-2010, a trend towards early onset of diabetes is evident. In addition to it, the total number of cases too has been on a constant increase with time. Hence this is a positive for CVS. This shows a general trend and we havent accounted for this effect specifically in our model.

MARKETS AND COMPETITION

As we discussed in the previous sections of this report, there are three major types of players in the pharmaceutical market namely health insurers, pharmacy benefit managers and pharmacy stores/networks. The major health insurers in the US market in terms of premiums paid are United Health, Anthem, Humana, Healthcare Service Corp and Aetna.

(Source: Statista Dossier Health Insurance in the US)

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These health insurers control 83%26 of the total market. With the number of insured in the US reaching 292mln in 2016, the count of members with these five large insurers is 242mln. With an average revenue of ~$50 per prescription and an average of 12 prescriptions per year, these account for a total of $145bln of the prescription drug revenue. Hence these insurers yield significant influence on the Pharmacy Benefit Managers, who form the next layer in the pharmacy supply chain.

The graph below shows the market share of the top Pharmacy Benefit Managers in the US. Express Scripts has a share of 26% followed by CVS with 25% and OptumRxs 22%. The other two PBMs are far behind the top three with Humana having 10% and Prime Therapeutics having 8% of the market share.

(Source: Statista Dossier US Prescription Market11)

It is important to take into consideration the vertical integration of these players. Express Scripts is a pureplay PBM whereas CVS Caremark is an integration of pharmacy and a PBM. OptumRx belongs to United Healthcare which shows a combination of a health insurer and a PBM. Prime Therapeutics has a joint venture with Walgreens named AllianceRx Walgreens Prime16.

The final type of player in the supply chain is the drug store/pharmacy. The following graph shows the market share of the various drug store chains in the US in terms of their prescription drug revenue.

(Source: Statista Dossier Drug Store/Pharmacy Market in the US)

As shown in the above graph, Walgreens and CVS are close to each other having a 25% market share in the prescription drug business. Rite Aid and Walmart follow CVS as third and fourth largest respectively in terms of market share. It is worth considering the number of drug stores under the top three players. Walgreens has 8,175 stores and has signed an asset purchase agreement to buy 2,186 stores of Rite Aid. This takes the total count of Walgreens stores to 10,361. CVS has 9,700 stores (stand-alone and within Target). Hence the Rite Aid acquisition further concentrates the market share between the top two players thereby giving significant bargaining power to Walgreens and CVS. With the second largest PBM too under its control, CVS as a single entity certainly has a significant bargaining power while dealing with the health insurers, other PBMs and pharmacy networks.

Peer Comparisons

In terms of competition, we consider Walgreens, Rite Aid, United Health, Express Scripts Humana and Walgreens. We have included Rite Aid and Walgreens mainly for their pharmacy network. Humana, Express Scripts and United Health (OptumRx) compete in the PBM space. The following tables compare the above listed companies in terms of various metrics.

(Source: FACTSET)

4.00%

6.00%

8.00%

10.00%

22.00%

25.00%

26.00%

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00%

All other

Medimpact

Prime Therapeutics

Humana Pharmacy Solutions

OptumRx (UnitedHealth)

CVS Health (Caremark)

Express Scripts

PBM Market Share

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Walgreens CVS Health Rite Aid Walmart CardinalHealth

HealthMart

Kroger Others

Market Share (Rx Sales - in $mln) of US Drug Stores

Company Name EBIT Margin EBITDA Margin Reinvestment Rate

Return on Equity

CVS Health 5.7% 7.0% 9.7% 15.3%Humana 4.6% - 14.9% 16.6%Rite Aid 1.3% 3.1% -11.6% -11.6%UnitedHealth 7.2% - 14.1% 20.9%Express Scripts 5.3% 7.3% 22.5% 22.5%Walgreens 4.8% 6.3% 8.7% 14.0%

The above table shows that United Health has the highest EBIT Margin and Express Scripts scores the best in terms of EBITDA Margin, Reinvestment Rate and Return on Equity. CVS ranks second in EBIT Margin, EBITDA Margin and better than Walgreens in RoE. So CVS has room to improve its margins, a proposal undertaken by CVS as a cost-cutting measure to save around 2bln through reorganization of its stores in areas with greater demand.

(Source: FACTSET)

The above table shows the debt side of the companies. CVS has a high long term debt/equity ratio, next to Express Scripts and Rite Aid. This is a result of the acquisition of Omnicare and the pharmacies within the Target stores. However, CVS is best positioned to service its interest from its annual earnings.

(Source: FACTSET)

The above table deals with the working capital turnover ratios with an emphasis on the liquidity of the companies. While CVS has the shortest inventory turnover cycle of 34 days among the pharmacy networks, it has the second longest Days of Payables next to Walgreens. Overall, CVS falls behind Walgreens in terms of Cash Conversion Cycle and is ahead of Rite Aid. Since these ratios are more related to the sale of goods, service oriented companies such as United Health, Humana and Express Scripts cannot be compared to the pharmacy network companies.

(Source: FACTSET)

The above table focuses on the liquidity ratios. Walgreens is better in terms of cash and quick ratio whereas Rite Aid is the best in current ratio. When compared to 2015, the long term debt and cash of Walgreens rose $5-$6bln in 2016. This liquid cash of around $9bln may be one of the reasons for the superior performance of Walgreens in terms of liquidity.

(Source: FACTSET)

According to the above graph, Express Scripts performs well in terms of Price/Book and Price/Earnings. However, CVS is undervalued when compared to the other two pharmacy networks namely Walgreens and Rite Aid. Furthermore, if the relationship between CVS and Aetna works out well, CVS may demand a higher multiple for having an insurer, PBM and pharmacy network in one package.

ECONOMIC OUTLOOK

Inflation

The following chart shows the Core Consumer Price Index (YoY) from January 2015. It can be seen that the inflation has been varying between 1.75% and 2.25% with an average around 2%.

Company NameEBIT/ Interest

ExpenseLT Debt/ Equity

CVS Health 10.09x 75.0%Humana - 39.1%Rite Aid 0.98x 1,287.5%UnitedHealth - 60.7%Express Scripts 7.48x 87.9%Walgreens 8.40x 47.0%

Company NameDays of

Inventory on Hand

Days of Payables

Outstanding

Days of Sales Outstanding

Cash Conversion

CycleCVS Health 34.1 40.6 25.7 19.2Humana - - - -Rite Aid 39.8 24.2 19.5 35.1UnitedHealth - - - -Express Scripts 7.1 33.6 26.3 -0.2Walgreens 35.9 44.6 20.1 11.3

Company Name Cash Ratio Current Ratio

Quick Ratio

CVS Health 0.08 1.09 0.56Humana - - -Rite Aid 0.07 1.65 0.73UnitedHealth - - -Express Scripts 0.14 0.69 0.58Walgreens 0.56 1.30 0.90

Company NamePrice/ Book

(Actual)Price/Earnings

(Actual)

CVS Health 2.47x 16.70xHumana 3.29x 20.26xRite Aid 4.94x -UnitedHealth 4.43x 23.82xExpress Scripts 2.30x 10.97xWalgreens 2.89x 20.83x

Core CPI A

s

(Source: Investing.com8)

The chart below shows the Conference Board Consumer Confidence Index.

Conference Board Consumer Confidence Index


As it can be seen above, the consumer confidence is close to the highest since January 2015 at around 120. Hence we can expect robust demand driving the prices northwards thereby giving a reason for the Federal Reserve to raise its interest rate at least by the beginning of next year if not in 2017. Inflation is an important factor of consideration in our model as the long-term growth values of revenue/prescription, revenue/claim processed, and revenue/year growth of front-store sales are anchored at 2%.

Unemployment Rate

The graph below shows the unemployment rate in the US since January 2015. Since then, the rate has been on an almost constant decline and reached 4.4% in August 2017. Though unemployment rate has not been directly accounted for in our model, this is an important factor of consideration for CVS in terms of its front-store sales on the retail side, and for Caremark in terms of the number of members/employers in its network.

Unemployment Rate in US


The graph below shows the average hourly earnings rise (month-on-month) since January 2013.

Average Hourly Earnings in US

(Source: Investing.com Average Hourly Earnings in US)

The decline in unemployment rate along with an increase of average hourly wages from $23.74 in Jan 2013 to $26.55 in Aug 2016 serves as a good sign for CVS in terms of demand for goods. However, it may pressurize CVS from the point of wage expenses. We have accounted for this growth in wages by assuming Selling, General and Administrative expenses as 10.5%-11% of sales.

Pharmacy/Drug Store Sales in US

The following graph shows the overall drug store sales in the US.

(Source: Statista Dossier Drug Store/Pharmacy Market in US12)

Since 2006, the overall sales has risen by around 37% with a CAGR of 4%. Being a non-discretionary good, drug sales have been consistent even during times of recession. This factor makes the market all the more appealing for investment. We have accounted for this effect in our model through corresponding assumption values for prescription per store volume growth.

CATALYSTS FOR GROWTH

The changing landscape of the pharmaceutical industry with PBMs enjoying significant pricing power may not last long. In the event of redistribution of power in the supply chain, vertically integrated business models tend to gain

With more focus on generics and step-therapy where the treatment of patients starts with generics and moves towards brand-name drugs/specialty medicines, the average revenue per prescription is declining. Hence profit margins play a key role to keep the bottom-line intact.

With Walgreens being the only major competitor in the pharmacy store space, emphasis on loyalty programs and additional services like MinuteClinics by CVS can have inflated benefits.

INVESTMENT POSITIVES

With Aetnas desire to acquire Humana and have an in-house PBM falling apart, it has built a strong relationship with CVS to make-up for the loss.

CVS stands second in PBM market share and pharmacy stores market share. Walgreens and Express Scripts, companies ahead of CVS in pharmacy and PBM space respectively, are not as vertically integrated as CVS.

CVS has a fair probability of winning Anthem contract which is expected to add around $1B to EBITDA.

CVS announced in its first quarter earnings that it won 50% of all the contracts that were up for bidding in early 2017.

INVESTMENT NEGATIVES

Loss of Prime Therapeutics and Tricare contracts will cost CVS a decline of around 40mln prescriptions on an annual basis.

Amazons entry will disrupt the market. With Walgreens in talks to purchase half of Rite Aids stores, almost 2000 stores will be open for acquisition.

Loss of Federal Employee Plan (specialty pharmacy) has increased the chances of losing the FEP mail order business as well which has a revenue of around $5.4B.

VALUATION

We evaluated the intrinsic value of CVS with three models namely Discounted Cash Flow, Dividend Discount and Relative P/E. In DCF model, our intrinsic value is $87.16, $78.72 in Relative P/E and $160.01 in DDM. Since our peer group in Relative P/E involves health insurers, PBMs and pharmacy networks, and as CVS cannot be considered a pure-play in any of the above segments, Relative P/E cannot be an accurate measure. CVS repurchased 45mln shares in 2016 and has an aggressive plan to buy-back shares worth $5B in 2017. This may hamper the dividend discount model if CVS decides to stay constant at the current dividend payout ratio. Hence we find DCF as the closes model to reality that factors in almost all the expectations we have.

Revenue Decomposition:

We have arrived at the consolidated revenue based on projections for individual segments. In the Pharmacy Services segment, the revenue is a direct proportion of total claims processed and revenue per claim. Total claims processed growth has been highly fluctuating from 32.48% in 2011 to 3%-9% in 2013-2015 and 21.55% in 2016. This is

191.02217.26 229.95

263.47

0

50

100

150

200

250

300

2006 2009 2012 2015

Pharmacy/Drug Store Sales in US (in $bln)

Pharmacy/Drug Store Sales in US (in $bln)

a direct function of the number of relationships with health insurers, the number of clients in their networks, exclusivity of the contract and relationship of CVS with individual employers. Currently, it is estimated that there are more than 100 small-scale PBMs operating within their limited networks winning regional businesses. Hence going forward, we have not modeled such high growth in any of the subsequent years. We estimate 4% growth in 2017-2018, gradually increasing to 6% continuing value growth. Revenue per claim is expected to decrease by 2% in 2017, stay at 0% in 2018 and grow at 2% then onwards. The decline and zero growth should take into account the shift towards generics from brand-name drugs which reduces the overall revenue. This trend will have a reduced impact beyond 2018 with inflation growing beyond 2%. Hence we predict the net effect of the revenue decline due to generics and revenue increase due to inflation lead to an overall rise in revenue of 2%.

The Retail/LTC segment revenue is a factor of the number of stores. Currently, we consider the stand-alone retail stores and the ones within Target. With further segmentation of revenue, we take a look at the prescriptions filled per store. It has risen from 100,000 per store in 2010 to around 126,000 per store in 2016. Going forward, we expect this number to gradually rise from 120,000 in 2017 to 125,000 in 2019 and stay constant going forward. Revenue per prescription is expected to not change in 2017 and 2018, and grow 1% in 2019 due to the effects mentioned in the previous section. In the subsequent years, it is estimated to grow at 2% on a year-on-year basis.

The other three segments of Retail/LTC namely General Merchandise and Other, OTC & Personal Care and Beauty/Cosmetics are expected to grow at a slightly higher rate from 2018-2022 when compared to their historical growth rates due to the expectation of new stores in the southern states, probability of winning the Anthem contract in 2019 and further traffic from Cigna and OptumRx deals.

In terms of gross profit margins, we predict the value to be 30% for Retail/LTC and 5.3%-7.0% for Pharmacy Services. The gross profits in retail segment will be primarily driven by the additional services such as MinuteClinic and more products from CVS-owned brands. The gross profit of the Pharmacy Services segment has been at around 7% on average since 2008 and we expect this to be the continuing value GPM.

In terms of the number of stores, we expect CVS to open 80, 90 stores in 2017 and 2018 respectively. In the subsequent years, CVS is expected to open 100 stores every year taking into consideration a historical average of 350 new stores per year from 2007-2016.

Operating Expenses:

Operating expenses are expected to rise to 11.0% of sales in 2019-2021 from 10.5% in 2017-2018 due to more number of stores being opened. Going forward, it is expected to settle down at 10.5%.

Other important Assumptions:

We expect LT Debt/NC Assets to be at 44%, ST Investments/Current Liabilities at 0.3%, Gross Accounts Receivables/Sales at 7%, Inventory/ Cost of Sales at 10%, and Net PPE growth to vary between 8%-9% from 2017-2024.

WACC:

We use variable WACC in our model. Risk-free rate of 2.8%, beta of 0.6, and a risk premium of 4,8% give us a cost of equity of 5.68%. Cost of debt is 4.55%. Market value of equity and debt are $85.3B and $50.7B respectively. With the above inputs, we get a WACC of 5.26% in 2016, WACC gradually rises to 6.74% in 2024 due to the changing capital structure of CVS.

Share Buybacks, ESOPs and Dividends:

Net share repurchase of CVS in 2016 was 45mln. The company has an aggressive target of $5B share repurchase in 2017. Hence we assume that the repurchases gradually decrease from 35M shares in 2017 to no repurchases in 2024 as this is more sustainable in the long-run. The total value of Options outstanding as of December 31, 2016 was $456mln. With an average strike price of $22.76, these ESOPs are expected to fetch a revenue of $143.6mln from 2017-2019 and $99mln in 2020.

The dividend in 2016 was $1.70 per share. Dividend growth rate has had a historical average of 25.3% since 2008 with a record of 42.86% growth in 2011. Going forward, we expect the dividend growth rate to be a constant 15%. This is a conservative estimate.

KEYS TO MONITOR

Anthem contract up for renewal in 4Q 2017 with the service beginning from Jan 2019 is important for CVS.

Amazons strategy in the pharmacy space will be important to assess the shift in market share.

More than $20bln revenue worth of contracts are up for renewal in 2017. CVSs success rate in winning them back should be watched.

REFERENCES

1. CVS 10K 2016, quarterly results/transcripts 2. Bloomberg Financial Statements, Debt Distribution Schedule, WACC, Company Guidance, Revenue Decomposition, etc. 3. Needham research reports on CVS 4. JP Morgan Pharmacy Benefit Management report dated 31 May 2017 5. JP Morgan Healthcare Technology report and Distribution dated 05 August, 2017 6.JP Morgan Retail Pharmacy report dated 20 July, 2017 7. Wells Fargo Specialty Pharma report dated August 18, 2017 8. Investing.com Economic Calendar - Core CPI data (YoY) 9. Investing.com Economic Calendar Unemployment rate data 10. Investing.com Economic Calendar Conference Board Consumer Confidence Index 11. Statista Dossier US Prescription Market - share of Pharmacy Benefit Managers 12. Statista Dossier US Drug Stores/Pharmacies 13. Statista Dossier US Most Influential Diseases 14. Mergent Online 15. FACTSET 16. Walgreens 10K and online articles related to Rite Aid acquisition 17. PBMWatch.com - MAC Information 18. USPharmacist.com - Understanding Drug Pricing 19. PrimeTherapeutics.com 20. Wikipedia - United Health Group 21. Wikipedia - Blue Cross Blue Shield Association 22. Anthem - Annual Report 23. LinkedIn and other online sources - Mark Lyons 24. Business Insider, CNBC and NYTimes articles on BlinkHealth 25. BlinkHealth.com 26. Statista Dossier - Health Insurance in the US

27. American Diabetes Association - http://care.diabetesjournals.org/content/36/9/2690

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowas Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

http://care.diabetesjournals.org/content/36/9/2690

CVSHealthCorporation(CVS)KeyValues

CostofDebt 4.55%CostofEquity 7.20%WACC 5.26%CVNOPLATGrowth 3.00%CVROIC 9.69%CVROE 14.29%InvRate 10.00%WorkingCash(%Sales) 1.50%CurrentStockPrice $80.41RiskfreeRate 2.80%DividendYield 1.40%RiskPremium 4.80%MarginalTaxRate 39.00%SharePrice(Sept11,2017) $87.16

CVLTDebt(%LTAssets) 30%CVRetailPharmacyGPM 30%CVPharmacyServicesGPM 5%CVPBMRevenueGrowth 10%CVRetailLTMGrowth 2.57%

CVSHealthCorporation(CVS)RevenueDecomp

Year 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E(In Millions)Revenue 139,367.00 153,290.00 177,526.00 177,689.78 184,172.74 194,865.15 205,536.99 218,101.69 231,540.42 245,707.86 260,648.99PBM 71,569.00 81,283.00 96,426.00 98,277.38 102,208.47 109,465.28 117,237.31 126,756.98 137,049.65 148,178.08 160,210.14Retail Pharmacy 67,798.00 72,007.00 81,100.00 79,412.40 81,964.27 85,399.87 88,299.67 91,344.71 94,490.78 97,529.78 100,438.85 Prescription Drugs 47,933.00 52,493.10 60,825.00 58,397.97 60,162.69 62,632.04 64,524.87 66,468.36 68,463.79 70,512.44 72,615.65 General Merchandise & Other 9,220.53 8,424.82 8,758.80 9,095.90 9,454.91 9,884.89 10,333.39 10,853.35 11,398.37 11,854.54 12,208.13 OTC & Personal Care 7,457.78 7,848.76 8,110.00 8,381.25 8,669.76 9,020.24 9,383.96 9,761.37 10,152.99 10,508.06 10,821.48 Beauty/Cosmetics 3,186.51 3,240.32 3,406.20 3,537.29 3,676.91 3,862.70 4,057.46 4,261.62 4,475.63 4,654.75 4,793.59

Per Store ValuesRevenue 17.82 15.93 18.28 18.15 18.64 19.53 20.39 21.43 22.53 23.67 24.87PBM (less Intersegment Sales) 9.15 8.44 9.93 10.04 10.35 10.97 11.63 12.45 13.33 14.28 15.29Retail Pharmacy 8.67 7.48 8.35 8.11 8.30 8.56 8.76 8.97 9.19 9.40 9.58 Prescription Drugs 6.13 5.45 6.26 5.97 6.09 6.28 6.40 6.53 6.66 6.79 6.93 General Merchandise & Other 1.18 0.88 0.90 0.93 0.96 0.99 1.03 1.07 1.11 1.14 1.17 OTC & Personal Care 0.95 0.82 0.84 0.86 0.88 0.90 0.93 0.96 0.99 1.01 1.03 Beauty/Cosmetics 0.41 0.34 0.35 0.36 0.37 0.39 0.40 0.42 0.44 0.45 0.46

Revenue GrowthRevenue 9.94% 9.99% 15.81% 0.09% 3.65% 5.81% 5.48% 6.11% 6.16% 6.12% 6.08%PBM (less Intersegment Sales) 17.05% 13.57% 18.63% 1.92% 4.00% 7.10% 7.10% 8.12% 8.12% 8.12% 10.00%Retail Pharmacy 3.32% 6.21% 12.63% 2.08% 3.21% 4.19% 3.40% 3.45% 3.44% 3.22% 2.98% Prescription Drugs 5.11% 9.51% 15.87% 3.99% 3.02% 4.10% 3.02% 3.01% 3.00% 2.99% 2.98% General Merchandise & Other 3.75% 8.63% 3.96% 3.85% 3.95% 4.55% 4.54% 5.03% 5.02% 4.00% 2.98% OTC & Personal Care 3.32% 5.24% 3.33% 3.34% 3.44% 4.04% 4.03% 4.02% 4.01% 3.50% 2.98% Beauty/Cosmetics 0.89% 1.69% 5.12% 3.85% 3.95% 5.05% 5.04% 5.03% 5.02% 4.00% 2.98%

Segment %age Share in RevenuePBM (less Intersegment Sales) 51.35% 53.03% 54.32% 55.31% 55.50% 56.17% 57.04% 58.12% 59.19% 60.31% 61.47%Retail Pharmacy 48.65% 46.97% 45.68% 44.69% 44.50% 43.83% 42.96% 41.88% 40.81% 39.69% 38.53% Prescription Drugs 34.39% 34.24% 34.26% 32.87% 32.67% 32.14% 31.39% 30.48% 29.57% 28.70% 27.86% General Merchandise & Other 6.62% 5.50% 4.93% 5.12% 5.13% 5.07% 5.03% 4.98% 4.92% 4.82% 4.68% OTC & Personal Care 5.35% 5.12% 4.57% 4.72% 4.71% 4.63% 4.57% 4.48% 4.38% 4.28% 4.15% Beauty/Cosmetics 2.29% 2.11% 1.92% 1.99% 2.00% 1.98% 1.97% 1.95% 1.93% 1.89% 1.84%

Gross Profit 25,367.00 26,528.00 28,857.00 29,032.42 30,210.75 32,187.88 34,110.33 36,276.40 37,940.71 39,631.40 41,346.37Retail Pharmacy 21,277.00 21,992.00 23,738.00 23,823.72 24,589.28 25,619.96 26,489.90 27,403.41 28,347.23 29,258.93 30,131.66PBM (less Intersegment Eliminations) 4,090.00 4,536.00 5,119.00 5,208.70 5,621.47 6,567.92 7,620.43 8,872.99 9,593.48 10,372.47 11,214.71

Gross Profit Margin 18.20% 17.31% 16.26% 16.34% 16.40% 16.52% 16.60% 16.63% 16.39% 16.13% 15.86%Retail Pharmacy 31.38% 30.54% 29.27% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00%PBM (less Intersegment Eliminations) 5.71% 5.58% 5.31% 5.30% 5.50% 6.00% 6.50% 7.00% 7.00% 7.00% 7.00%

StoresNet New Store Additions 162 1803 84 80 90 100 100 100 100 100 100Retail Stores 7822 7953 8035 8115 8205 8305 8405 8505 8605 8705 8805Pharmacy Within Target 0 1672 1674 1674 1674 1674 1674 1674 1674 1674 1674Retail Stores + Pharmacies within Target 7822 9625 9709 9789 9879 9979 10079 10179 10279 10379 10479

Pharmacy Services Revenue Calculations (PBM)Revenue per claim (in $) 76.79 80.33 78.40 76.83 76.83 78.36 79.93 81.53 83.16 84.82 86.52Revenue per claim growth 13.30% 4.61% -2.41% 2.00% 0.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%Claims Processed (PBM) 932.00 1,011.90 1,230.00 1,279.20 1,330.37 1,396.89 1,466.73 1,554.73 1,648.02 1,746.90 1,851.71Claims Processed (Growth) 3.31% 8.57% 21.55% 4.00% 4.00% 5.00% 5.00% 6.00% 6.00% 6.00% 6.00%Total Claims Revenue 71,569.00 81,283.00 96,426.00 98,277.38 102,208.47 109,465.28 117,237.31 126,756.98 137,049.65 148,178.08 160,210.14

Pharmacy Revenue CalculationsPrescriptions Filled (Retail Pharma) 935.90 1,031.60 1,223.50 1,174.68 1,210.18 1,247.38 1,259.88 1,272.38 1,284.88 1,297.38 1,309.88Prescriptions per Store 0.1196 0.1072 0.1260 0.1200 0.1225 0.1250 0.1250 0.1250 0.1250 0.1250 0.1250Revenue per Prescription (in $) 51.22 50.89 49.71 49.71 49.71 50.21 51.22 52.24 53.28 54.35 55.44Revenue per Prescription Growth -0.04% -0.65% -2.30% 0.00% 0.00% 1.00% 2.00% 2.00% 2.00% 2.00% 2.00%Total Prescription Drug Revenue 47,933.00 52,493.10 60,825.00 58,397.97 60,162.69 62,632.04 64,524.87 66,468.36 68,463.79 70,512.44 72,615.65

SegmentwiseRevenueperStoreGeneral Merchandise & Other 1.18 0.88 0.90 0.93 0.96 0.99 1.03 1.07 1.11 1.14 1.17General Merchandise & Other (Growth) 5.75% 25.75% 3.06% 3.00% 3.00% 3.50% 3.50% 4.00% 4.00% 3.00% 2.00%

OTC & Personal Care 0.95 0.82 0.84 0.86 0.88 0.90 0.93 0.96 0.99 1.01 1.03OTC & Personal Care (Growth) 1.18% 14.47% 2.43% 2.50% 2.50% 3.00% 3.00% 3.00% 3.00% 2.50% 2.00%

Beauty/Cosmetics 0.41 0.34 0.35 0.36 0.37 0.39 0.40 0.42 0.44 0.45 0.46Beauty/Cosmetics(Growth) 2.95% 17.36% 4.21% 3.00% 3.00% 4.00% 4.00% 4.00% 4.00% 3.00% 2.00%

TotalSegmentRevenuesGeneral Merchandise & Other 9,220.53 8,424.82 8,758.80 9,095.90 9,454.91 9,884.89 10,333.39 10,853.35 11,398.37 11,854.54 12,208.13OTC & Personal Care 7,457.78 7,848.76 8,110.00 8,381.25 8,669.76 9,020.24 9,383.96 9,761.37 10,152.99 10,508.06 10,821.48Beauty/Cosmetics 3,186.51 3,240.32 3,406.20 3,537.29 3,676.91 3,862.70 4,057.46 4,261.62 4,475.63 4,654.75 4,793.59

CVSHealthCorporation(CVS)IncomeStatement(InM)Year 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Netrevenues 139,367 153,290 177,526 177,690 184,173 194,865 205,537 218,102 231,540 245,708 260,649D&A 1,150 1,238 1,446 1,524 1,638 1,702 1,825 1,956 2,095 2,243 2,399CostofRevenues 112,850 125,524 147,223 148,657 153,962 162,677 171,427 181,825 193,600 206,076 219,303Grossprofit 25,367 26,528 28,857 29,032 30,211 32,188 34,110 36,276 37,941 39,631 41,346

Operatingexpenses 16,568 17,074 18,519 18,657 19,338 21,435 22,609 23,991 24,312 25,799 28,671D&A 1,150 1,238 1,446 1,524 1,638 1,702 1,825 1,956 2,095 2,243 2,399Operatingprofit(loss) 8,799 9,454 10,338 8,851 9,235 9,051 9,676 10,329 11,534 11,589 10,276

Interestincome(expense),net 600 838 1,058 976 976 979 1,071 1,122 1,127 1,135 1,143

Gain(loss)onearlyextinguishmentofdebt 521 643 0 0 0 0 0 0 0 0Income(loss)beforeincometaxprovision 7,678 8,616 8,637 7,875 8,259 8,072 8,605 9,207 10,406 10,454 9,133

Totalcurrentincometaxprovision 3,076 3,620 3,314 3,071 3,221 3,148 3,356 3,591 4,058 4,077 3,562Totaldeferredincometaxprovision(benefit) 43 234 3 0 0 0 0 0 0 0 0Incometaxprovision 3,033 3,386 3,317 3,071 3,221 3,148 3,356 3,591 4,058 4,077 3,562

Income(loss)fromcontinuingoperations 4,645 5,230 5,320 4,804 5,038 4,924 5,249 5,616 6,348 6,377 5,571Income(loss)fromdiscontinuedoperations,net 1 7 3 0 0 0 0 0 0 0 0NetincomeattributabletoCVSHealthCorporation 4,644 5,237 5,317 4,804 5,038 4,924 5,249 5,616 6,348 6,377 5,571

Yearendsharesoutstanding 1,140,000 1,101,000 1,061,000 1,032,308 1,008,615 989,923 974,275 959,275 949,275 944,275 944,275TotalDividendPaid 1,254,000 1,541,400 1,803,700 2,018,161 2,267,619 2,559,433 2,896,822 3,280,056 3,732,742 4,270,043 4,910,550DividendperShare 1.10 1.40 1.70 1.96 2.25 2.59 2.97 3.42 3.93 4.52 5.20EarningsperShare 4.07 4.76 5.01 4.65 4.99 4.97 5.39 5.85 6.69 6.75 5.90ReturnonEquity 12.23% 14.08% 14.44% 13.05% 13.65% 13.28% 14.05% 14.79% 16.24% 15.71% 13.37%EPSgrowth 4.68% 16.76% 5.36% 7.14% 7.33% 0.42% 8.32% 8.68% 14.21% 0.99% 12.64%

CVSHealthCorporation(CVS)BalanceSheet(InThousands)Year 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Cash&cashequivalents 2,481,000 2,459,000 3,371,000 2,185,755 1,292,997 230,982 1,665,136 2,072,486 2,852,545 3,313,126 3,190,904Shortterminvestments 34,000 88,000 87,000 79,567 81,581 85,228 89,642 94,326 98,846 103,582 109,305

Accountsreceivable,gross 9,943,000 12,049,000 12,450,000 12,438,285 12,892,092 13,640,560 14,387,589 15,267,118 16,207,830 17,199,550 18,245,429Less:allowancefordoubtfulaccounts 256,000 161,000 286,000 372,543 436,746 647,623 512,736 462,714 586,436 490,048 469,761Accountsreceivable,net 9,687,000 11,888,000 12,164,000 12,065,742 12,455,346 12,992,937 13,874,853 14,804,404 15,621,394 16,709,502 17,775,669

Inventories 11,930,000 14,001,000 14,760,000 14,865,736 15,396,200 16,267,727 17,142,666 18,182,529 19,359,972 20,607,646 21,930,263Deferredincometaxes 985,000 1,220,000 0 0 0 0 0 0 0 0 0Othercurrentassets 866,000 722,000 660,000 639,683 663,022 701,515 739,933 785,166 833,546 884,548 938,336Totalcurrentassets 25,983,000 30,378,000 31,042,000 29,836,484 29,889,146 30,278,389 33,512,231 35,938,910 38,766,302 41,618,404 43,944,477

Totalproperty&equipment,gross 18,786,000 21,036,000 22,802,000 24,578,898 26,420,625 28,369,277 30,424,647 32,605,664 34,921,068 37,378,146 39,984,636Accumulateddepreciation&amortization 9,943,000 11,181,000 12,627,000 14,150,892 15,788,970 17,491,127 19,316,606 21,272,946 23,368,210 25,610,898 28,009,977Property&equipment,net 8,843,000 9,855,000 10,175,000 10,428,006 10,631,655 10,878,150 11,108,041 11,332,718 11,552,858 11,767,248 11,974,660

Goodwill 28,142,000 38,106,000 38,249,000 38,249,000 38,249,000 38,249,000 38,249,000 38,249,000 38,249,000 38,249,000 38,249,000Intangibleassets,net 9,774,000 13,878,000 13,511,000 13,240,780 12,975,964 12,846,205 12,717,743 12,717,743 12,717,743 12,844,920 12,973,369Otherassets 1,510,000 1,440,000 1,485,000 1,457,056 1,510,217 1,597,894 1,685,403 1,788,434 1,898,631 2,014,804 2,137,322Totalnoncurrentassets 48,269,000 63,279,000 63,420,000 63,374,842 63,366,836 63,571,249 63,760,187 64,087,894 64,418,232 64,875,972 65,334,351Totalassets 74,252,000 93,657,000 94,462,000 93,211,326 93,255,981 93,849,638 97,272,418 100,026,805 103,184,534 106,494,376 109,278,828

Accountspayable 6,547,000 7,490,000 7,946,000 7,640,661 7,735,255 7,989,471 8,221,479 8,505,966 8,798,536 9,091,191 9,383,364Claims&discountspayable 5,404,000 7,653,000 9,451,000 8,884,489 9,208,637 9,743,257 10,276,849 10,905,084 11,577,021 12,285,393 13,032,450Accruedexpenses 5,816,000 6,829,000 6,937,000 6,929,902 7,182,737 7,599,741 8,015,942 8,505,966 9,030,077 9,582,607 10,425,960Shorttermdebt 685,000 0 1,874,000 1,951,945 1,951,699 1,957,994 2,142,342 2,243,076 2,254,638 2,270,659 2,286,702Currentportionoflongtermdebt 575,000 1,197,000 42,000 1,115,397 1,115,256 1,118,854 1,224,196 1,281,758 1,288,365 1,297,519 1,306,687Totalcurrentliabilities 19,027,000 23,169,000 26,250,000 26,522,394 27,193,584 28,409,318 29,880,809 31,441,850 32,948,637 34,527,369 36,435,162

Totallongtermdebt 12,955,000 27,694,000 27,726,000 27,884,931 27,881,408 27,971,349 30,604,890 32,043,947 32,209,116 32,437,986 32,667,175

GrossLTDebt 12,955,000 27,464,000 27,531,000 27,884,931 27,881,408 27,971,349 30,604,890 32,043,947 32,209,116 32,437,986 32,667,175

Less:shorttermdebt,commercialpaper 685,000 1,874,000 1,951,945 1,951,699 1,957,994 2,142,342 2,243,076 2,254,638 2,270,659 2,286,702Less:currentportionoflongtermdebt 575,000 1,197,000 42,000 1,115,397 1,115,256 1,118,854 1,224,196 1,281,758 1,288,365 1,297,519 1,306,687Longtermdebt 11,695,000 26,267,000 25,615,000 24,817,588 24,814,453 24,894,501 27,238,352 28,519,113 28,666,113 28,869,808 29,073,786

Deferredincometaxes 4,036,000 5,437,000 4,214,000 3,371,200 2,528,400 1,685,600 842,800 0 0 0 0Otherlongtermliabilities 1,531,000 1,542,000 1,549,000 1,711,121 1,710,905 1,716,424 1,721,525 1,730,373 1,739,292 1,751,651 1,764,027Redeemablenoncontrollinginterest 0 39,000 0 0 0 0 0 0 0 0 0TotalLongTermLiabilities 17,262,000 33,285,000 31,378,000 29,899,909 29,053,757 28,296,525 29,802,677 30,249,486 30,405,406 30,621,459 30,837,814TotalLiabilities 36,289,000 56,454,000 57,628,000 56,422,303 56,247,342 56,705,842 59,683,486 61,691,337 63,354,042 65,148,828 67,272,976

CommonStock,Trust,ESOPs,CapitalSurplus 30,404,000 30,934,000 31,604,000 31,747,560 31,891,120 32,034,680 32,133,736 32,133,736 32,133,736 32,133,736 32,133,736Treasurystock,atcost 24,078,000 28,886,000 33,452,000 36,426,205 39,120,325 41,492,947 43,498,856 45,088,740 46,208,866 46,800,740 46,800,740Retainedearnings 31,849,000 35,506,000 38,983,000 41,768,669 44,538,845 46,903,062 49,255,052 51,591,472 54,206,622 56,313,552 56,973,856Accumulatedothercomprehensiveincome(loss) 217,000 358,000 305,000 305,000 305,000 305,000 305,000 305,000 305,000 305,000 305,000TotalCVSHealthCorporationshareholders'equity 37,958,000 37,196,000 36,830,000 36,785,023 37,004,640 37,139,795 37,584,932 38,331,468 39,826,492 41,341,548 42,001,852Noncontrollinginterest 5,000 7,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000 4,000Totalshareholders'equity 37,963,000 37,203,000 36,834,000 36,789,023 37,008,640 37,143,795 37,588,932 38,335,468 39,830,492 41,345,548 42,005,852

CVSHealthCorporation(CVS)CashFlowStatement(InThousands)

Year 2012 2013 2014 2015 2016Cash receipts from customers 113,205,000 114,993,000 132,406,000 148,954,000 172,310,000Cash paid for inventory & prescriptions dispensed by retail network pharmacie -90,032,000 -91,178,000 -105,362,000 -122,498,000 -142,511,000Cash paid to other suppliers & employees -13,643,000 -14,295,000 -15,344,000 -14,162,000 -15,550,000Interest received 4,000 8,000 15,000 21,000 20,000Interest paid -581,000 -534,000 -647,000 -629,000 -1,140,000Income taxes paid -2,282,000 -3,211,000 -2,931,000 -3,274,000 -3,060,000Net cash flows from operating activities 6,671,000 5,783,000 8,137,000 8,412,000 10,069,000

Purchases of property & equipment -2,030,000 -1,984,000 -2,136,000 -2,367,000 -2,224,000Proceeds from sale-leaseback transactions 529,000 600,000 515,000 411,000 230,000Proceeds from sale of property & equipment 23,000 54,000 11,000 - -Proceeds from sale of property & equipment & other assets - - - 35,000 37,000Acquisitions (net of cash acquired) & other investments -378,000 -415,000 -2,439,000 -11,475,000 -539,000Purchase of available-for-sale investments - -226,000 -157,000 -267,000 -65,000Sale or maturity of available-for-sale investments - 136,000 - - -Maturity of available-for-sale investments - - 161,000 243,000 91,000Proceeds from sale of subsidiary 7,000 - - - -Net cash flows from investing activities -1,849,000 -1,835,000 -4,045,000 -13,420,000 -2,470,000

Increase (decrease) in short-term debt -60,000 -690,000 685,000 -685,000 1,874,000Proceeds from issuance of long-term debt 1,239,000 3,964,000 1,483,000 14,805,000 3,455,000Repayments of long-term debt -1,718,000 - -3,100,000 -2,902,000 -5,943,000Purchase of noncontrolling interest in subsidiary -26,000 - - - -39,000Payment of contingent consideration - - - -58,000 -26,000Dividends paid -829,000 -1,097,000 -1,288,000 -1,576,000 -1,840,000Proceeds from exercise of stock options 836,000 500,000 421,000 299,000 224,000Excess tax benefits from stock based compensation 28,000 62,000 106,000 127,000 72,000Repurchase of common stock -4,330,000 -3,976,000 -4,001,000 -5,001,000 -4,461,000Other cash flows from financing activities - - - -3,000 -5,000Net cash flows from financing activities -4,860,000 -1,237,000 -5,694,000 5,006,000 -6,689,000

Effect of exchange rate changes on cash and cash equivalents - 3,000 -6,000 -20,000 2,000Net increase (decrease) in cash & cash equivalents -38,000 2,714,000 -1,608,000 -22,000 912,000Cash & cash equivalents at the beginning of the yea 1,413,000 1,375,000 4,089,000 2,481,000 2,459,000Cash & cash equivalents at the end of the year 1,375,000 4,089,000 2,481,000 2,459,000 3,371,000

Net income 3,875,000 4,592,000 4,644,000 5,239,000 5,319,000Depreciation & amortization 1,753,000 1,870,000 1,931,000 2,092,000 2,475,000Stock-based compensation 132,000 141,000 165,000 230,000 222,000Loss on early extinguishment of debt 348,000 - 521,000 - 643,000Deferred income taxes & other noncash items -106,000 -86,000 -58,000 -266,000 153,000Accounts receivable, net -387,000 -2,210,000 -737,000 -1,594,000 -243,000Inventories -858,000 12,000 -770,000 -1,141,000 -742,000Other current assets 3,000 105,000 -383,000 355,000 35,000Other assets -99,000 -135,000 9,000 2,000 -43,000Accounts payable 1,147,000 - - - -Accounts payable & claims & discounts payable - 1,024,000 1,742,000 2,834,000 2,189,000Accrued expenses 753,000 471,000 1,060,000 765,000 59,000Other long-term liabilities 110,000 -1,000 13,000 -104,000 2,000Net cash flows from operating activities 6,671,000 5,783,000 8,137,000 8,412,000 10,069,000

CVSHealthCorporation(CVS)CashFlowStatementForecast(InThousands)Year 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Net income (loss) 4,803,830 5,037,795 4,923,650 5,248,812 5,616,476 6,347,892 6,376,974 5,570,854Interest Expense 975,973 975,849 978,997 1,071,171 1,121,538 1,127,319 1,135,330 1,143,351Depreciation and Amortization 1,523,892 1,638,079 1,702,157 1,825,479 1,956,340 2,095,264 2,242,689 2,399,078Change in A/R -98,258 389,604 537,591 881,916 929,551 816,990 1,088,108 1,066,167Change in Inventory 105,736 530,464 871,527 874,939 1,039,863 1,177,443 1,247,674 1,322,617Change in Other Current Assets -20,317 23,339 38,493 38,419 45,233 48,379 51,003 53,788Change in A/P -305,339 94,595 254,216 232,008 284,486 292,570 292,655 292,173Change in Claims & discounts payable -566,511 324,148 534,620 533,592 628,235 671,937 708,372 747,057Change in Accrued expenses -7,098 252,835 417,004 416,202 490,023 524,111 552,530 843,353Change in Deferred IT Liabilities -842,800 -842,800 -842,800 -842,800 -842,800 0 0 0

Net operating Cash Flow 5,594,784 6,537,095 6,520,233 6,689,190 7,239,652 9,016,281 8,921,764 8,553,294

Change in Short-term investments -7,433 2,014 3,647 4,414 4,683 4,520 4,736 5,723Capex (PP&E) 1,776,898 1,841,727 1,948,651 2,055,370 2,181,017 2,315,404 2,457,079 2,606,490Capex (Intangibles) -270,220 -264,816 -129,760 -128,462 0 0 127,177 128,449Change in Other Assets -27,944 53,160 87,678 87,509 103,031 110,198 116,173 122,517Total Net Investing Cash Flows -1,471,301 -1,632,086 -1,910,217 -2,018,831 -2,288,731 -2,430,122 -2,705,165 -2,863,180

Change in Short Term Debt 77,945 -247 6,296 184,348 100,734 11,562 16,021 16,043Change in Current Portion of Long Term Debt 1,073,397 -141 3,598 105,342 57,562 6,607 9,155 9,168Change in Gross LT Debt -797,412 -3,135 80,048 2,343,851 1,280,761 147,000 203,694 203,978Interest Expense 975,973 975,849 978,997 1,071,171 1,121,538 1,127,319 1,135,330 1,143,351Change in Other LT Liabilities 162,121 -216 5,519 5,101 8,848 8,919 12,359 12,376Change in Treasury Stock 2,974,205 2,694,120 2,372,622 2,005,909 1,589,884 1,120,126 591,875 0Dividends Paid 2,018,161 2,267,619 2,559,433 2,896,822 3,280,056 3,732,742 4,270,043 4,910,550Change due to ESOP 143,560 143,560 143,560 99,056 0 0 0 0Total Net Financing Cash Flows -5,308,728 -5,797,767 -5,672,031 -3,236,205 -4,543,572 -5,806,099 -5,756,018 -5,812,336

Beginning Cash 3,371,000 2,185,755 1,292,997 230,982 1,665,136 2,072,486 2,852,545 3,313,126Net Cash Flow -1,185,245 -892,758 -1,062,015 1,434,154 407,349 780,059 460,580 -122,221Ending Cash 2,185,755 1,292,997 230,982 1,665,136 2,072,486 2,852,545 3,313,126 3,190,904

CVSHealthCorporation(CVS)CommonSizeIncomeStatement

Year 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Netrevenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%CostofRevenues 80.97% 81.89% 82.93% 83.66% 83.60% 83.48% 83.40% 83.37% 83.61% 83.87% 84.14%Grossprofit 18.20% 17.31% 16.26% 16.34% 16.40% 16.52% 16.60% 16.63% 16.39% 16.13% 15.86%Operatingexpenses 11.89% 11.14% 10.43% 10.50% 10.50% 11.00% 11.00% 11.00% 10.50% 10.50% 11.00%D&A 0.83% 0.81% 0.81% 0.86% 0.89% 0.87% 0.89% 0.90% 0.90% 0.91% 0.92%Operatingprofit(loss) 6.31% 6.17% 5.82% 4.98% 5.01% 4.64% 4.71% 4.74% 4.98% 4.72% 3.94%Interestincome(expense),net 0.43% 0.55% 0.60% 0.55% 0.53% 0.50% 0.52% 0.51% 0.49% 0.46% 0.44%Gain(loss)onearlyextinguishmentofdebt 0.37% 0.36% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Income(loss)beforeincometaxprovision 5.51% 5.62% 4.87% 4.43% 4.48% 4.14% 4.19% 4.22% 4.49% 4.25% 3.50%Totalcurrentincometaxprovision 2.21% 2.36% 1.87% 1.73% 1.75% 1.62% 1.63% 1.65% 1.75% 1.66% 1.37%Totaldeferredincometaxprovision(benefit) 0.03% 0.15% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Incometaxprovision 2.18% 2.21% 1.87% 1.73% 1.75% 1.62% 1.63% 1.65% 1.75% 1.66% 1.37%Income(loss)fromcontinuingoperations 3.33% 3.41% 3.00% 2.70% 2.74% 2.53% 2.55% 2.58% 2.74% 2.60% 2.14%Income(loss)fromdiscontinuedoperations,net 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Netincome(loss) 3.33% 3.42% 3.00% 2.70% 2.74% 2.53% 2.55% 2.58% 2.74% 2.60% 2.14%Less:netincome(loss)attributabletononcontrollinginterest 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Less:preferencedividends,netofincometaxbenefit 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%NetincomeattributabletoCVSHealthCorporation 3.33% 3.42% 3.00% 2.70% 2.74% 2.53% 2.55% 2.58% 2.74% 2.60% 2.14%

CVSHealthCorporation(CVS)CommonSizeBalanceSheet

Year 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Cash & cash equivalents 1.78% 1.60% 1.90% 1.23% 0.70% 0.12% 0.81% 0.95% 1.23% 1.35% 1.22%Short-term investments 0.02% 0.06% 0.05% 0.04% 0.04% 0.04% 0.04% 0.04% 0.04% 0.04% 0.04%

Accounts receivable, gross 7.13% 7.86% 7.01% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%Less: allowance for doubtful accounts 0.18% 0.11% 0.16% 0.21% 0.24% 0.33% 0.25% 0.21% 0.25% 0.20% 0.18%Accounts receivable, net 6.95% 7.76% 6.85% 6.79% 6.76% 6.67% 6.75% 6.79% 6.75% 6.80% 6.82%

Inventories 8.56% 9.13% 8.31% 8.37% 8.36% 8.35% 8.34% 8.34% 8.36% 8.39% 8.41%Deferred income taxes 0.71% 0.80% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other current assets 0.62% 0.47% 0.37% 0.36% 0.36% 0.36% 0.36% 0.36% 0.36% 0.36% 0.36%Total current assets 18.64% 19.82% 17.49% 16.79% 16.23% 15.54% 16.30% 16.48% 16.74% 16.94% 16.86%

Total property & equipment, gross 13.48% 13.72% 12.84% 13.83% 14.35% 14.56% 14.80% 14.95% 15.08% 15.21% 15.34%Accumulated depreciation & amortization 7.13% 7.29% 7.11% 7.96% 8.57% 8.98% 9.40% 9.75% 10.09% 10.42% 10.75%Property & equipment, net 6.35% 6.43% 5.73% 5.87% 5.77% 5.58% 5.40% 5.20% 4.99% 4.79% 4.59%

Goodwill 20.19% 24.86% 21.55% 21.53% 20.77% 19.63% 18.61% 17.54% 16.52% 15.57% 14.67%Intangible assets, net 7.01% 9.05% 7.61% 7.45% 7.05% 6.59% 6.19% 5.83% 5.49% 5.23% 4.98%Other assets 1.08% 0.94% 0.84% 0.82% 0.82% 0.82% 0.82% 0.82% 0.82% 0.82% 0.82%Total non-current assets 34.63% 41.28% 35.72% 35.67% 34.41% 32.62% 31.02% 29.38% 27.82% 26.40% 25.07%Total assets 53.28% 61.10% 53.21% 52.46% 50.64% 48.16% 47.33% 45.86% 44.56% 43.34% 41.93%

Accounts payable 4.70% 4.89% 4.48% 4.30% 4.20% 4.10% 4.00% 3.90% 3.80% 3.70% 3.60%Claims & discounts payable 3.88% 4.99% 5.32% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%Accrued expenses 4.17% 4.45% 3.91% 3.90% 3.90% 3.90% 3.90% 3.90% 3.90% 3.90% 4.00%Short-term debt 0.49% 0.00% 1.06% 1.10% 1.06% 1.00% 1.04% 1.03% 0.97% 0.92% 0.88%Current portion of long-term debt 0.41% 0.78% 0.02% 0.63% 0.61% 0.57% 0.60% 0.59% 0.56% 0.53% 0.50%Total current liabilities 13.65% 15.11% 14.79% 14.93% 14.77% 14.58% 14.54% 14.42% 14.23% 14.05% 13.98%

Total long-term debt 9.30% 18.07% 15.62% 15.69% 15.14% 14.35% 14.89% 14.69% 13.91% 13.20% 12.53%

Debt premiums 0.00% 0.03% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Debt discounts & deferred financing costs 0.00% -0.18% -0.13% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Gross LT Debt 9.30% 17.92% 15.51% 15.69% 15.14% 14.35% 14.89% 14.69% 13.91% 13.20% 12.53%

Less: short-term debt, commercial paper 0.49% 0.00% 1.06% 1.10% 1.06% 1.00% 1.04% 1.03% 0.97% 0.92% 0.88%Less: current portion of long-term debt 0.41% 0.78% 0.02% 0.63% 0.61% 0.57% 0.60% 0.59% 0.56% 0.53% 0.50%Long-term debt 8.39% 17.14% 14.43% 13.97% 13.47% 12.78% 13.25% 13.08% 12.38% 11.75% 11.15%

Deferred income taxes 2.90% 3.55% 2.37% 1.90% 1.37% 0.87% 0.41% 0.00% 0.00% 0.00% 0.00%Other long-term liabilities 1.10% 1.01% 0.87% 0.96% 0.93% 0.88% 0.84% 0.79% 0.75% 0.71% 0.68%Redeemable noncontrolling interest 0.00% 0.03% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total Long-Term Liabilities 12.39% 21.71% 17.68% 16.83% 15.78% 14.52% 14.50% 13.87% 13.13% 12.46% 11.83%Total Liabilities 26.04% 36.83% 32.46% 31.75% 30.54% 29.10% 29.04% 28.29% 27.36% 26.51% 25.81%

Common Stock, Trust, ESOPs, Capital Surplus 21.82% 20.18% 17.80% 17.87% 17.32% 16.44% 15.63% 14.73% 13.88% 13.08% 12.33%Treasury stock, at cost 17.28% 18.84% 18.84% 20.50% 21.24% 21.29% 21.16% 20.67% 19.96% 19.05% 17.96%Retained earnings 22.85% 23.16% 21.96% 23.51% 24.18% 24.07% 23.96% 23.65% 23.41% 22.92% 21.86%

Accumulated other comprehensive income (loss) -0.16% -0.23% -0.17% -0.17% -0.17% -0.16% -0.15% -0.14% -0.13% -0.12% -0.12%Total CVS Health Corporation shareholders' equity 27.24% 24.27% 20.75% 20.70% 20.09% 19.06% 18.29% 17.58% 17.20% 16.83% 16.11%Noncontrolling interest 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total shareholders' equity 27.24% 24.27% 20.75% 20.70% 20.09% 19.06% 18.29% 17.58% 17.20% 16.83% 16.12%

CVSHealthCorporation(CVS)Drivers(InThousands)

CostofDebt 4.55%EffectiveITRate 39.00%WorkingCash(%Sales) 1.50%CostofEquity 5.68%

Year 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024EFederalTaxRate 35% 35% 35% 35% 35% 35% 35% 35% 35% 35% 35%StateTaxRate 4% 4% 4% 4% 4% 4% 4% 4% 4% 4% 4%Total 39% 39% 39% 39% 39% 39% 39% 39% 39% 39% 39%WACC 5.26% 5.57% 5.89% 6.21% 6.50% 6.51% 6.53% 6.56% 6.59%

EBITANetrevenues 139,367,000 153,290,000 177,526,000 177,689,784 184,172,744 194,865,148 205,536,985 218,101,689 231,540,423 245,707,859 260,648,992Costofrevenues 114,000,000 126,762,000 148,669,000 148,657,362 153,961,997 162,677,270 171,426,658 181,825,288 193,599,715 206,076,459 219,302,626D&A 1,150,000 1,238,000 1,446,000 1,523,892 1,638,079 1,702,157 1,825,479 1,956,340 2,095,264 2,242,689 2,399,078CostofRevenues 112,850,000 125,524,000 147,223,000 148,657,362 153,961,997 162,677,270 171,426,658 181,825,288 193,599,715 206,076,459 219,302,626Grossprofit 25,367,000 26,528,000 28,857,000 29,032,423 30,210,747 32,187,878 34,110,328 36,276,401 37,940,708 39,631,400 41,346,366

Operatingexpenses 16,568,000 17,074,000 18,519,000 18,657,427 19,338,138 21,435,166 22,609,068 23,991,186 24,311,744 25,799,325 28,671,389D&A 1,150,000 1,238,000 1,446,000 1,523,892 1,638,079 1,702,157 1,825,479 1,956,340 2,095,264 2,242,689 2,399,078Operatingprofit(loss) 8,799,000 9,454,000 10,338,000 8,851,104 9,234,530 9,050,555 9,675,780 10,328,876 11,533,700 11,589,386 10,275,898ImpliedInterestonOperatingLeases 1,035,698 1,052,672 1,045,989 1,091,291 1,112,603 1,138,398 1,162,456 1,185,969 1,209,007 1,231,442 1,253,148EBITA 9,834,698 10,506,672 11,383,989 9,942,394 10,347,133 10,188,954 10,838,237 11,514,845 12,742,706 12,820,828 11,529,047

AdjustedTaxesIncomeTaxProvision 3,033,000 3,386,000 3,317,000 3,071,301 3,220,886 3,147,908 3,355,798 3,590,862 4,058,488 4,077,082 3,561,693ITonInterest 1,182,870 1,320,540 1,293,630 1,197,807 1,256,145 1,227,684 1,308,761 1,400,436 1,582,810 1,590,062 1,389,060ImpliedITonOperatingLeaseInterest 403,922 410,542 407,936 425,603 433,915 443,975 453,358 462,528 471,513 480,263 488,728AdjustedTaxes 4,619,792 5,117,082 5,018,566 4,694,712 4,910,946 4,819,567 5,117,917 5,453,826 6,112,811 6,147,406 5,439,482

DeferredTaxesChangeinDeferredTaxLiabilities 135,000 1,401,000 1,223,000 842,800 842,800 842,800 842,800 842,800 0 0 0ChangeinDeferredTaxAssets 83,000 235,000 1,220,000 0 0 0 0 0 0 0 0NetChangeinDefTaxLiabilities 52,000 1,166,000 3,000 842,800 842,800 842,800 842,800 842,800 0 0 0

NOPLAT 5,266,906 6,555,590 6,362,423 4,404,882 4,593,387 4,526,587 4,877,520 5,218,219 6,629,895 6,673,422 6,089,565

INVESTEDCAPITALWorkingCash 2,090,505 2,299,350 2,662,890 2,665,347 2,762,591 2,922,977 3,083,055 3,271,525 3,473,106 3,685,618 3,909,735AccountsReceivablesNet 9,687,000 11,888,000 12,164,000 12,065,742 12,455,346 12,992,937 13,874,853 14,804,404 15,621,394 16,709,502 17,775,669Inventory 11,930,000 14,001,000 14,760,000 14,865,736 15,396,200 16,267,727 17,142,666 18,182,529 19,359,972 20,607,646 21,930,263OtherCurrentAssets 866,000 722,000 660,000 639,683 663,022 701,515 739,933 785,166 833,546 884,548 938,336NetOperCurrentAssets 24,573,505 28,910,350 30,246,890 30,236,508 31,277,159 32,885,156 34,840,507 37,043,624 39,288,017 41,887,314 44,554,003

Accountspayable 6,547,000 7,490,000 7,946,000 7,640,661 7,735,255 7,989,471 8,221,479 8,505,966 8,798,536 9,091,191 9,383,364Claims&discountspayable 5,404,000 7,653,000 9,451,000 8,884,489 9,208,637 9,743,257 10,276,849 10,905,084 11,577,021 12,285,393 13,032,450Accruedexpenses 5,816,000 6,829,000 6,937,000 6,929,902 7,182,737 7,599,741 8,015,942 8,505,966 9,030,077 9,582,607 10,425,960NetOperCurrentLiabilities 17,767,000 21,972,000 24,334,000 23,455,051 24,126,629 25,332,469 26,514,271 27,917,016 29,405,634 30,959,190 32,841,773

NetWorkingCapital 6,806,505 6,938,350 5,912,890 6,781,457 7,150,530 7,552,687 8,326,236 9,126,608 9,882,383 10,928,124 11,712,230

NetPP&E 8,843,000 9,855,000 10,175,000 10,428,006 10,631,655 10,878,150 11,108,041 11,332,718 11,552,858 11,767,248 11,974,660NetIntangibles 9,774,000 13,878,000 13,511,000 13,240,780 12,975,964 12,846,205 12,717,743 12,717,743 12,717,743 12,844,920 12,973,369OperatingLeases 22,762,596 23,135,646 22,988,772 23,984,414 24,452,806 25,019,744 25,548,494 26,065,251 26,571,573 27,064,670 27,541,717

OtherLongTermAssets 1,510,000 1,440,000 1,485,000 1,457,056 1,510,217 1,597,894 1,685,403 1,788,434 1,898,631 2,014,804 2,137,322OtherLongTermLiabilities 1,531,000 1,542,000 1,549,000 1,711,121 1,710,905 1,716,424 1,721,525 1,730,373 1,739,292 1,751,651 1,764,027NetOtherLongTermAssets 21,000 102,000 64,000 254,065 200,688 118,530 36,122 58,061 159,339 263,153 373,294

InvestedCapital 48,165,101 53,704,996 52,523,662 54,180,593 55,010,267 56,178,256 57,664,391 59,300,380 60,883,897 62,868,115 64,575,270

NOPLAT 5,266,906 6,555,590 6,362,423 4,404,882 4,593,387 4,526,587 4,877,520 5,218,219 6,629,895 6,673,422 6,089,565IC 48,165,101 53,704,996 52,523,662 54,180,593 55,010,267 56,178,256 57,664,391 59,300,380 60,883,897 62,868,115 64,575,270ROIC 10.96% 13.61% 11.85% 8.39% 8.48% 8.23% 8.68% 9.05% 11.18% 10.96% 9.69%EP 2,736,696 4,020,295 3,535,521 1,479,362 1,404,825 1,112,768 1,224,553 1,466,287 2,757,800 2,682,098 1,949,581FCF 5,170,301 1,015,695 7,543,757 2,747,951 3,763,713 3,358,598 3,391,385 3,582,230 5,046,378 4,689,204 4,382,410

CVSHealthCorporation(CVS)SanityChecks

Year 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024EProfitabilityRatios

Gross Margin (Gross Profit/Rev) 18.20% 17.31% 16.26% 16.34% 16.40% 16.52% 16.60% 16.63% 16.39% 16.13% 15.86%Operating Margin (Oper Profit/Rev) 6.31% 6.17% 5.82% 4.98% 5.01% 4.64% 4.71% 4.74% 4.98% 4.72% 3.94%Net Profit Margin (NI/Rev) 3.33% 3.42% 3.00% 2.70% 2.74% 2.53% 2.55% 2.58% 2.74% 2.60% 2.14%PreTax Margin (EBT/Rev) 5.51% 5.62% 4.87% 4.43% 4.48% 4.14% 4.19% 4.22% 4.49% 4.25% 3.50%

Return on LT Assets (NI/Avg LT Assets) 10.05% 10.85% 8.40% 7.57% 7.95% 7.77% 8.26% 8.81% 9.90% 9.90% 8.59%Return on Total Capital (NI/Total Cap) 9.15% 10.55% 8.38% 7.69% 8.18% 7.96% 8.46% 8.66% 9.50% 9.31% 7.93%Return on Common Equity (NI/Avg Common Eq) 12.24% 13.80% 14.29% 13.04% 13.69% 13.30% 14.13% 14.94% 16.56% 16.01% 13.47%

ActivityRatios

InventoryTurnover 9.82 9.68 10.24 10.04 10.18 10.28 10.26 10.29 10.31 10.31 10.31DaysofInventoryinhand(365D)(days) 37.15 37.70 35.65 36.37 35.87 35.52 35.57 35.46 35.39 35.40 35.40ReceivablesTurnover 15.14 14.21 14.76 14.67 15.02 15.31 15.30 15.21 15.22 15.20 15.12DaysofReceivablesOutstanding(365D)(days) 24.12 25.69 24.73 24.89 24.30 23.83 23.86 24.00 23.98 24.01 24.15PayablesTurnover 18.81 18.18 19.17 19.09 20.10 20.80 21.26 21.86 22.51 23.18 23.88DaysofPayablesOutstanding(365D)(days) 19.41 20.08 19.04 19.12 18.16 17.55 17.17 16.69 16.21 15.75 15.28CashCoversionCycle(days) 41.86 43.31 41.34 42.13 42.01 41.81 42.25 42.76 43.16 43.66 44.26

FixedAsset(PPE)Turnover 15.97 16.40 17.73 17.25 17.49 18.12 18.70 19.44 20.23 21.07 21.96WorkingCapitalTurnover(NetCurAssets) 16.54 21.64 29.59 43.84 61.29 85.38 74.73 53.66 44.90 38.07 35.70TotalAssetTurnover 1.91 1.83 1.89 1.89 1.98 2.08 2.15 2.21 2.28 2.34 2.42

LiquidityRatiosCurentRatio 1.37 1.31 1.18 1.12 1.10 1.07 1.12 1.14 1.18 1.21 1.21QuickRatio 0.74 0.71 0.62 0.56 0.53 0.49 0.55 0.56 0.59 0.61 0.60CashRatio 0.13 0.11 0.13 0.09 0.05 0.01 0.06 0.07 0.09 0.10 0.09

SolvencyRatiosLTDebt/LTAssetsRatio 0.24 0.42 0.40 0.39 0.39 0.39 0.43 0.45 0.45 0.45 0.45TotalLiab/Equity 0.45 0.89 0.85 0.81 0.79 0.76 0.79 0.79 0.76 0.74 0.73InterestCoverageRatio 14.67 11.28 9.77 9.07 9.46 9.24 9.03 9.21 10.23 10.21 8.99FinancialLeverage(Assets/Equity) 1.96 2.52 2.56 2.53 2.52 2.53 2.59 2.61 2.59 2.58 2.60

PayoutRatiosDividendPayoutRatio(Div/NI) 27.00% 29.43% 33.92% 42.01% 45.01% 51.98% 55.19% 58.40% 58.80% 66.96% 88.15%

CVSHealthCorporation(CVS)WACC(Allvaluesinthousands)EQUITY 2016 2017 2018 2019 2020 2021 2022 2023 2024Riskfreerate 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80%Beta 0.60 0.70 0.80 0.90 1.00 1.00 1.00 1.00 1.00RiskPremium 4.80% 4.80% 4.80% 4.80% 4.80% 4.80% 4.80% 4.80% 4.80%CostofEquity 5.68% 6.16% 6.64% 7.12% 7.60% 7.60% 7.60% 7.60% 7.60%

PriceperShare $80.41 $84.98 $89.80 $94.90 $100.30 $105.99 $112.01 $118.37 $125.10NumberofSharesOutstanding 1,061,000 1,032,308 1,008,615 989,923 974,275 959,275 949,275 944,275 944,275MarketValueofEquity $85,315,010 87,722,699 90,577,675 93,948,486 97,715,361 101,675,709 106,330,764 111,778,477 118,127,494

DEBTRiskFreeRate 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80%Spread 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% 1.75%CostofDebt 4.55% 4.55% 4.55% 4.55% 4.55% 4.55% 4.55% 4.55% 4.55%MarketValueofDebt(LT+ST) $26,764,000 26,769,533 26,766,151 26,852,495 29,380,694 30,762,189 30,920,751 31,140,467 31,360,488PVofOperatingLeases $22,988,772 $23,984,414 $24,452,806 $25,019,744 $25,548,494 $26,065,251 $26,571,573 $27,064,670 $27,541,717MVofTotalDebt $49,752,772 $50,753,948 $51,218,958 $51,872,240 $54,929,188 $56,827,440 $57,492,325 $58,205,137 $58,902,205

WACCCalculationMarginalTaxRate 39% 39% 39% 39% 39% 39% 39% 39% 39%WACC 5.26% 5.57% 5.89% 6.21% 6.50% 6.51% 6.53% 6.56% 6.59%

CVSHealthCorporation(CVS)DiscountedCashFlow/EconomicProfitModels

KeyInputs:CVNOPLATGrowth 3%CVROIC 9.69%InvRate 10%CostofEquity 5.68%

FiscalYearsEnding 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024EWACC 5.26%DCFModelNOPLAT 6,362,423 4,404,882 4,593,387 4,526,587 4,877,520 5,218,219 6,629,895 6,673,422 6,089,565InvestedCapital 52,523,662 54,180,593 55,010,267 56,178,256 57,664,391 59,300,380 60,883,897 62,868,115 64,575,270Capex 1,

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