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Table of Contents
We believe that we are in material compliance with existing laws and regulations applicable to our retail and PBM businesses. We have
implemented standard operating procedures, internal controls and a compliance and integrity program designed to help ensure such
compliance, and we monitor legislative and judicial developments that could impact our business practices in an effort to ensure future
We can give no assurance, however, that our business, financial condition and results of operations will not be materially adversely affected, or
that we will not be required to materially change our business practices, based on: (i) future enactment of new health care or other laws or
regulations; (ii) the interpretation or application of existing laws or regulations, including the laws and regulations described in this
Government Regulation section, as they may relate to our business or the pharmacy services or retail industry; (iii) pending or future federal or
state governmental investigations of our business or the pharmacy services or retail industry; (iv) institution of government enforcement actions
against us; (v) adverse developments in any pending qui tam lawsuit against us, whether sealed or unsealed, or in any future qui tam lawsuit
that may be filed against us; or (vi) adverse developments in other pending or future legal proceedings against us or affecting the pharmacy
services or retail industry.
Available Information
CVS Caremark Corporation is a Delaware corporation. Our corporate office is located at One CVS Drive, Woonsocket, Rhode Island 02895,
telephone (401) 765-1500. Our common stock is listed on the New York Stock Exchange under the trading symbol “CVS.” General
information about CVS Caremark is available through the Company’s Web site at . Our financial press releases
and filings with the Securities and Exchange Commission are available free of charge within the Investors section of our Web site at . In addition, the SEC maintains an internet site that contains reports, proxy and information statements
and other information regarding issuers, such as the Company, that file electronically with the SEC. The address of that Web site is .
Item 1A. Risk Factors
Our business is subject to various industry, economic, regulatory and other risks and uncertainties. These risks include those described below
and may include additional risks and uncertainties not presently known to us or that we currently deem to be immaterial.
The health of the economy in general and in the markets we serve could adversely affect our business and our financial results.
Our business is affected by the economy in general, including changes in consumer purchasing power, preferences and/or spending patterns.
These changes could affect drug utilization trends as well as the financial health and number of covered lives of our PBM clients, resulting in
an adverse effect on our business and financial results.
In that regard, the economic recession resulted in declining drug utilization trends which continued into 2010. Although a recovery might be
underway, it is possible that a worsening of the economic environment will cause further decline in drug utilization, and dampen demand for
pharmacy benefit management services as well as consumer demand for products sold in our retail stores. If this were to occur, our business
and financial results could be adversely affected.
Further, interest rate fluctuations, changes in capital market conditions and regulatory changes may affect our ability to obtain necessary
financing on acceptable terms, our ability to secure suitable store locations under acceptable terms and our ability to execute sale-leaseback
transactions under acceptable terms.
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Inability to fully realize the benefits of our fully integrated pharmacy services model.
We may not be able to achieve all of the anticipated long-term strategic benefits of the March 2007 Caremark merger. An inability to realize
the full extent of, or any of the anticipated benefits could have an adverse effect on our business, financial position and results of operations,
which may affect the value of the shares of our common stock.
Risks relating to the pending acquisition of UAC’s Medicare Part D business
In December 2010, the Company announced it had entered into an agreement to acquire the Medicare Part D business of UAC for
approximately $1.25 billion. The transaction is subject to customary closing conditions, including necessary regulatory approvals, as well as
approval by UAC shareholders. The Company currently expects that the transaction will close by the end of the second quarter of 2011. In the
event the closing is delayed or does not occur and/or the regulatory review process materially alters the terms of the acquisition, the Company
may not be able to realize the expected benefits of the transaction.
Efforts to reduce reimbursement levels and alter health care financing practices could adversely affect our businesses.
The continued efforts of health maintenance organizations, managed care organizations, PBM companies, government entities, and other third
party payors to reduce prescription drug costs and pharmacy reimbursement rates may impact our profitability. In particular, increased
utilization of generic pharmaceuticals (which normally yield a higher gross profit rate than equivalent brand named drugs), has resulted in
pressure to decrease reimbursement payments to retail and mail order pharmacies for generic drugs, causing a reduction in the generic profit
rate. In addition, during the past several years, the U.S. health care industry has been subject to an increase in governmental regulation at both
the federal and state levels. Efforts to control health care costs, including prescription drug costs, are underway at the federal and state
government levels. Changing political, economic and regulatory influences may affect health care financing and reimbursement practices. If the
current health care financing and reimbursement system changes significantly, the Company’s business, financial position and results of
operations could be materially adversely affected.
PPACA made several significant changes to Medicaid rebates and reimbursement. One of these changes was to revise the definition of AMP
and the reimbursement formula for multi-source drugs. CMS has not yet issued regulations implementing these changes. Therefore, we cannot
predict the effect these changes will have on Medicaid reimbursement or their impact on the Company. In addition, PPACA made other
changes that affect the coverage and plan designs that are or will be provided by many of our health plan clients, including the requirement for
health insurers to meet a minimum MLR to avoid having to pay rebates to enrollees. These PPACA changes may not affect our business
directly, but they could indirectly impact our services and/or business practices.
The possibility of PBM client loss and/or the failure to win new PBM business may adversely affect our business, financial position and
results of operations.
Our PBM business generates net revenues primarily by contracting with clients to provide prescription drugs and related health care services to
plan members. PBM client contracts often have terms of approximately three years in duration, so approximately one third of a PBM’s client
base typically is subject to renewal each year. In some cases, however, PBM clients may negotiate a shorter or longer contract term or may
require early or periodic renegotiation of pricing prior to expiration of a contract. Therefore, we face challenges in competing for new PBM
business and retaining or renewing PBM business. Although none of our PBM clients represented more than 10% of our Company’s
consolidated revenues in 2010, our top 10 clients are expected to represent approximately 21% of such revenues in 2011. There can be no
assurance that we will be able to win new
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business or secure renewal business on terms as favorable to the Company as the present terms. Our failure to renew or win PBM business
could adversely affect our business, financial position and results of operations.
Risks related to the frequency and rate of the introduction of generic drugs and brand name prescription products.
The profitability of retail and mail order pharmacy businesses are dependent upon the utilization of prescription drug products. Utilization
trends are affected by, among other factors, the introduction of new and successful prescription pharmaceuticals as well as lower priced generic
alternatives to existing brand name products. Accordingly, a slowdown in the introduction of new and successful prescription pharmaceuticals
and/or generic alternatives (the sale of which normally yield higher gross profit margins than brand name equivalents) could adversely affect
our business, financial position and results of operations.
Risks of declining gross margins in the PBM industry.
The PBM industry has been experiencing margin pressure as a result of competitive pressures and increased client demands for lower prices,
enhanced service offerings and/or higher service levels. In that regard, our Company maintains contractual relationships with generic
pharmaceutical manufacturers and brand name pharmaceutical manufacturers that provide for purchase discounts and/or rebates on drugs
dispensed by pharmacies in our retail network and by our mail order pharmacies (all or a portion of which may be passed on to clients).
Manufacturer rebates often depend on a PBM’s ability to meet contractual market share or other requirements, including in some cases the
placement of a manufacturer’s products on the PBM’s formularies. Competitive pressures in the PBM industry have caused Caremark and
other PBMs to share with clients a larger portion of rebates and/or discounts received from pharmaceutical manufacturers. In addition, market
dynamics and regulatory changes have impacted our ability to offer plan sponsors pricing that includes the use of retail “differential” or
“spread”, which could negatively impact our future profitability. Further, changes in existing federal or state laws or regulations or the adoption
of new laws or regulations relating to patent term extensions, purchase discount and rebate arrangements with pharmaceutical manufacturers, or
to formulary management or other PBM services could also reduce the discounts or rebates we receive. Accordingly, margin pressure in the
PBM industry resulting from these trends could adversely affect our business, financial position and results of operations.
Regulatory and business changes relating to our participation in Medicare Part D may adversely affect our business, financial position and
our results of operations.
Since its inception in 2006, Medicare Part D has resulted in increased utilization and decreased pharmacy gross margin rates as higher margin
business, such as cash and state Medicaid customers, migrated to Medicare Part D coverage. Further, as a result of Medicare Part D and as a
result of the elimination in 2013 of the tax deductibility of the retiree drug subsidy payment received by sponsors of retiree drug plans, our
PBM clients could decide to discontinue providing prescription drug benefits to their Medicare-eligible members. To the extent this occurs, the
adverse effects of Medicare Part D may outweigh any opportunities for new business generated by the new benefit. In addition, if the cost and
complexity of Medicare Part D exceed management’s expectations or prevent effective program implementation or administration; if changes
to the regulations regarding how drug costs are reported for Medicare Part D and retiree drug subsidy purposes are implemented in a manner
that impacts the profitability of our Medicare Part D business; if the government alters Medicare program requirements or reduces funding
because of the higher-than-anticipated cost to taxpayers of Medicare Part D or for other reasons; if we fail to design and maintain programs that
are attractive to Medicare participants; if CMS imposes sanctions or other restrictions on our Medicare Part D business as a result of audits or
other regulatory actions; or if we are not successful in retaining enrollees, or winning contract renewals or new contracts under Medicare Part
D’s competitive bidding process, our Medicare Part D services and the ability to expand our Medicare Part D services could be materially and
adversely affected, and our business, financial position and results of operations may be adversely affected.
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Changes in industry pricing benchmarks could adversely affect our business, financial position and results of operations.
Implementation of the FDB and Medi-Span settlements, described in the Government Regulation section, have resulted in changes in the
methodology used to calculate AWP, which is the pricing reference used for many of our PBM client contracts, pharmaceutical purchase
agreements, retail network contracts, specialty payor agreements and other contracts with third party payors. Following these settlements, FDB
has indicated that it intends to discontinue the publishing of AWP altogether in September 2011. Although Medi-Span has indicated that it
intends to continue publishing AWP for the foreseeable future, we believe the pharmaceutical industry will be evaluating and/or developing an
alternative pricing reference to replace AWP.
Future changes to the use of AWP or to other published pricing benchmarks used to establish pharmaceutical pricing, including changes in the
basis for calculating reimbursement by federal and state health programs and/or other payors, could impact the reimbursement we receive from
Medicare and Medicaid programs, the reimbursement we receive from PBM clients and other payors and/or our ability to negotiate rebates
and/or discounts with pharmaceutical manufacturers, wholesalers, PBMs and retail pharmacies. The effect of these possible changes on our
business cannot be predicted at this time.
The industries in which we operate are extremely competitive and competition could adversely affect our business, financial position and
results of operations.
Each of the retail pharmacy business and the PBM business currently operates in a highly competitive environment. As a pharmacy retailer, we
compete with other drugstore chains, supermarkets, discount retailers, independent pharmacies, membership clubs, Internet companies and
retail health clinics, as well as other mail order pharmacies and PBMs. In that regard, many pharmacy benefit plans have implemented plan
designs that mandate or provide incentives to fill maintenance medications through mail order pharmacies. To the extent this trend continues,
our retail pharmacy business could be adversely affected (although the effect of this would likely be mitigated by an increase in our own mail
order business). In addition, some of these competitors may offer services and pricing terms that we may not be willing or able to offer.
Competition may also come from other sources in the future. As a result, competition could have an adverse effect on our business, financial
position and results of operations.
Competitors in the PBM industry include large national PBM companies, such as Medco Health Solutions, Inc. and Express Scripts, Inc., as
well as many local or regional PBMs. In addition, there are several large health insurers and managed care plans (e.g., United Healthcare and
CIGNA) and retail pharmacies which have their own PBM capabilities as well as several other national and regional companies that provide
some or all of the same services. Some of these competitors may offer services and pricing terms that we may not be willing or able to offer. In
addition, competition may also come from other sources in the future. As a result, competition could have an adverse effect on our business,
financial position and results of operations.
Reform of the U.S. health care system may adversely affect our financial performance and the services we provide.
Congressional efforts to reform the U.S. health care system finally came to fruition in 2010 with the passage of PPACA, which will bring about
the most significant structural changes to the health insurance system in decades. While the bulk of the structural changes enacted by PPACA
will not be implemented until 2014, and some of the key changes, such as the individual mandate, are already being challenged at the judicial
and legislative levels, it is expected that there will be increased government involvement in health care and regulation of PBM or pharmacy
services. This may change the way the Company or its clients do business. Health plan sponsors may react to these changes and the uncertainty
surrounding them by reducing or delaying purchases of cost control mechanisms and related services that the Company would provide. The
Company cannot predict what effect, if any, the PPACA changes may have on its retail and pharmacy services businesses. Other legislative or
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driven changes in the health care system that the Company cannot anticipate could also have an adverse effect on our business, financial
position and results of operations.
Our inability to comply with a broad and complex regulatory framework could adversely affect our business, financial position and results
of operations.
The PBM business and retail drugstore business are subject to numerous federal, state and local laws and regulations. See “Business –
Government Regulation.” Changes in these regulations may require extensive system and operating changes that may be difficult to implement.
Untimely compliance or noncompliance with applicable laws and regulations could adversely affect the continued
operation of our business, including, but not limited to: imposition of civil or criminal penalties; suspension of payments from government
programs; loss of required government certifications or approvals; loss of authorizations to participate in or exclusion from government
reimbursement programs, such as the Medicare and Medicaid programs; or loss of licensure. The regulations to which we are subject include,
but are not limited to: the laws and regulations described in the Government Regulation section; accounting standards; tax laws and
regulations; laws and regulations relating to the protection of the environment and health and safety matters, including those governing
exposure to, and the management and disposal of, hazardous materials and wastes; and regulations of the FDA, the FTC, the DEA, and the
Consumer Product Safety Commission, as well as state regulatory authorities, governing the sale, advertisement and promotion of products that
we sell. We are also subject to the terms of the government agreements described in the Government Regulation section. In that regard, our
business, financial position and results of operations could be affected by existing and new government legislative and regulatory action,
including, without limitation, any one or more of the following:
federal and state laws and regulations governing the purchase, distribution, management, dispensing and reimbursement of
prescription drugs and related services, whether at retail or mail, and applicable licensing requirements;
the effect of the expiration of patents covering brand name drugs and the introduction of generic products;
the frequency and rate of approvals by the FDA of new brand named and generic drugs, or of over-the-counter status for brand
name drugs;
FDA regulation …
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