This summary is based on the first quarter fiscal 2008 earnings call conducted by CVS Caremark Corporation (CVS: chart) on May 1, 2008.

Management:

Chief Financial Officer, Executive Vice President, Chief Administrative Officer: David B. Rickard
President, Caremark: Howard A. McLure
Senior Vice President, Investor Relations: Nancy Christal

Key Investors Issues

- EPS were 51 cents a share compared to 43 cents a share last year.
- Profit was $745 million compared to $405.4 million a year earlier.
- Net revenue rose to $21.3 billion from $13.2 billion a year ago.

First Quarter Highlights

Total revenues on a consolidated basis increased 62% to $21.3 billion.

- This figure is net of inter-segment eliminations of $1.3 billion.
- In retail drugstore segment, revenue increased 5.4% to $11.8 billion.
- Same-store sales were 3.9%, in line with guidance.

PBM segment net revenues of $10.8 billion increased 2.3% over the comparable 2007 first quarter figure.

Adjusting that growth rate for the impact of generics, net revenues would have grown 10.6% for the PBM. The impact on the change in PharmaCare’s revenue recognition method on the first quarter was the addition of approximately $710.5 million in reported revenues before inter-company eliminations, or about $555.4 million after eliminations.

Total retail network revenues were $7 billion, rising 12% from 2007 levels.

- Setting aside the increase from PharmaCare’s revenue recognition change, retail network revenue increased 0.6%. At the same time, retail network claims grew 5.7%. This was predominantly driven by new business, including the growth spurt in PDP, which experienced healthy growth in Med D lives this year.
- The PBM’s retail generic dispensing rate increased to 65.2% compared to 59.9% in the first quarter of 2007. This significant increase in the generic dispensing rate explains the disparity between retail network revenue growth and retail network claims growth.

- As expected, mail claims decreased by 17.7% on a comparable basis. The impact of new clients was more than offset by previously announced terminations, namely FEP, State of New York, and Ohio State Teachers Retirement System.
- As a reminder, the portion of the FEP business that the company no longer services is the mail order piece, including PBM mail and specialty mail. The company continues to service FEP’s retail networks.

- Total mail revenues declined 12.4% to $3.6 billion and within total mail revenues, PBM mail was down 21.1% compared to the first quarter of 2007, while specialty mail revenues increased 4.6%. Excluding the FEP business from last year’s data, total mail revenues increased 4% and specialty revenues grew 14.4%.
- The mail generic dispensing rate rose to 52.8% from 45.8% a year ago. That is a healthy 700 basis points of growth. Excluding FEP, the increase drops to 600 basis points. Overall mail penetration rate decreased five percentage points from 2007’s first quarter to 23.1%, again largely as a result of the absence of the FEP mail business.

Within the retail segment, gross profit margins were up 200 basis points over the first quarter of 2007 to 29.6%.

The primary drivers of this on the pharmacy side continued to be the substantial margin expansion experienced from the increased utilization of generic pharmaceuticals as well as merger related purchasing synergies.

- At the same time, front store margins improved. That reflected not only an improved product mix and reduced shrink in acquired stores, but also the benefits of the extra care card that result in a lower percent of products sold on promotion.
- Offsetting these gains somewhat was continued pressure on generic reimbursement rates, as well as an increase in the percentage of pharmacy sales handled by third-party insurance.
Gross profit margins in the PBM segment on a comparable basis expanded to 7.3%. That is up 10 basis points versus 2007’s first quarter, and includes the 52 basis point drag from the conversion of PharmaCare’s contracts.
- Like the retail segment, PBM pharmacy margin continued to benefit from the purchasing synergies derived from the merger, as well as an increase in the conversion of branded drugs to generic equivalence. The company anticipates a greater impact from new generics in the second half of the year. PBM would see higher profitability later in the year from the Med D business in light of the widened risk corridors and the related accounting.

Overall operating expenses as a percentage of sales improved due to the change in mix between retail and PBM.

- In the retail segment, operating expenses increased as a percent of sales from 22.1% to 22.5%. This was primarily caused by the significant growth in generics, which pressure sales dollars while improving profitability.
- Adjusting for the growth in generic dispensing rate at retail, operating expenses as a percentage of sales for the retail business actually improved by more than 80 basis points.
- In the PBM segment, comparable operating expense as a percentage of revenues improved by 10 basis points to 2.3%.

- The retail segment’s operating profit margin grew by 150 basis points over 2007 to 7.1%, while the PBM segments operating profit margin improved by 20 basis points over 2007’s comparable results.
- PBM’s industry-leading EBITDA per adjusted claim increased to $3.41 excluding integration costs, or 6.9% over last year’s $3.19. Excluding the FEP mail business, the company would have had double-digit growth in EBITDA per adjusted claim, so the underlying growth of the business is excellent.