Overview of Our Business

CVS Caremark Corporation ("we", "our", the "Company") is the largest provider of prescriptions in the United States. We fill or manage more than one billion prescriptions annually. As a fully integrated pharmacy services company, we believe we can drive value for our customers by effectively managing pharmaceutical costs and improving health care outcomes through our pharmacy benefit management, mail order and specialty pharmacy division, Caremark Pharmacy Services ®; our more than 7,000 CVS/pharmacy® and Longs Drug® retail stores; our retail-based health clinic subsidiary, MinuteClinic®; and our online pharmacy, CVS.com ®.

We strive to improve clinical outcomes to help employers and health plans control their health care costs. In that regard, we offer disease management, health assessment and wellness services to help plan participants manage and protect against potential health risks and avoid future health costs.

Today's health care delivery system is rapidly changing. Health care is becoming more consumer-centric as the U.S. health care system struggles to manage growing costs and employers are shifting more of the responsibility for managing those costs to employees. In addition, the aging population, increasing incidences of chronic diseases and increasing utilization of the Medicare drug benefit are fueling the demand for prescriptions and pharmacy services. Further, cost-effective generic drugs are becoming more widely available and new drug therapies are being introduced to treat unmet health care needs and reduce hospital stays. Consumers require medication management programs and better information to help them get the most out of their health care dollars. To assist our consumers with these requirements, we have introduced integrated pharmacy healthcare services that provide an earlier, easier, more effective approach to engaging plan participants in behaviors that can help lower costs, improve health, and save lives. Examples include: Maintenance Choice™ (a flexible fulfillment option that affords eligible plan participants the convenient choice of picking up their 90-day supply of maintenance medications at any CVS/pharmacy store or obtaining them through mail order in either case at the cost of mail, which is typically lower, for both the plan participant and payor); enhanced medication adherence programs; Bridge Supply; and a new ExtraCare ® Health Card program. As a fully integrated pharmacy services company, we believe we are well positioned to provide solutions to address these trends and improve the pharmacy services experience for consumers.

During the third quarter of 2009, we made changes to our reportable segments to reflect changes that were made to the way our management evaluates the performance of operations, develops strategy and allocates resources. This change involves the reclassification of certain administrative expenses previously recorded within the Pharmacy Services and Retail Pharmacy segments to a new Corporate segment. The Corporate segment consists of costs primarily associated with executive management, corporate relations, legal, compliance, human resources, corporate information technology and finance. This change had no impact on our consolidated results of operations. As a result of this change, our business now includes three segments: Pharmacy Services, Retail Pharmacy and Corporate. Our historical segment disclosures have been revised to conform to the current presentation.

During the third quarter of 2009, we also made a change to our Pharmacy Services segment as it relates to our intersegment activities (such as the Maintenance Choice program). This change impacts the gross profit and operating profit lines within the Pharmacy Services segment. Under the Maintenance Choice program, Pharmacy Services customers can elect to pick-up their maintenance prescriptions at Retail Pharmacy segment stores instead of receiving them through the mail. When this occurs, both the Pharmacy Services and Retail Pharmacy segments now record the revenue, gross profit and operating profit on a standalone basis and corresponding intersegment eliminations are made. This change is reflected in the Pharmacy Services segment results in the third quarter of 2009 and in the nine months ended September 30, 2009. This change had no impact on our consolidated results of operations.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Fiscal Year Change

On December 23, 2008, the Board of Directors of the Company approved a change in the our fiscal year end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect our position in the health care, rather than the retail, industry. The fiscal year change was effective beginning with the fourth quarter of fiscal 2008. The third quarter of 2009 and 2008 include 92 days and 91 days, respectively, and the nine months ended September 30, 2009 and September 27, 2008 both include 273 days.

Results of Operations

The following discussion explains the material changes in our results of operations for the third quarters and nine months ended September 30, 2009 and September 27, 2008 and the significant developments affecting our financial condition since December 31, 2008. We strongly recommend that you read our audited consolidated financial statements and footnotes and Management's Discussion and Analysis of Financial Condition and Results of Operations included as Exhibit 13 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the "2008 Form 10-K") along with this report.

Third Quarter and Nine Months Ended September 30, 2009 and September 27, 2008

Summary of the Condensed Consolidated Financial Results:



                                                          Third Quarter Ended                            Nine Months Ended
                                                  September 30,          September 27,          September 30,          September 27,
In millions, except per share amounts                 2009                   2008                   2009                   2008
Net revenues                                     $      24,641.9        $      20,863.4        $      72,906.9        $      63,329.7
Gross profit                                             5,011.7                4,400.6               14,811.9               13,066.8
Operating expenses                                       3,445.8                2,934.4               10,269.0                8,752.4

Operating profit                                         1,565.9                1,466.2                4,542.9                4,314.4
Interest expense, net                                      122.8                  112.7                  392.8                  358.3

Income from continuing operations before
income tax provision                                     1,443.1                1,353.5                4,150.1                3,956.1
Income tax provision                                       420.0                  534.7                1,494.4                1,565.3

Income from continuing operations                        1,023.1                  818.8                2,655.7                2,390.8
Loss from discontinued operations, net of
income tax benefit                                          (1.8 )                (82.8 )                 (9.5 )               (131.5 )

Net income                                       $       1,021.3        $         736.0        $       2,646.2        $       2,259.3

Diluted earnings per common share:
Income from continuing operations                $          0.71        $          0.56        $          1.82        $          1.63
Loss from discontinued operations                             -                   (0.06 )                (0.01 )                (0.09 )

Diluted net earnings per common share            $          0.71        $          0.50        $          1.81        $          1.54

Net revenues increased $3.8 billion and $9.6 billion during the third quarter and nine months ended September 30, 2009, respectively. As you review our performance in this area, we believe you should consider the following important information:

• Effective October 20, 2008, we acquired Longs Drug Stores Corporation, which included 529 retail drug stores (the "Longs Drug Stores"), RxAmerica, LLC ("RxAmerica"), which provides pharmacy benefit management services and Medicare Part D benefits, and other related assets (collectively, the

Management's Discussion and Analysis of Financial Condition and Results of Operations

"Longs Acquisition"). During the third quarter and nine months ended September 30, 2009, the Longs Acquisition, net of intersegment eliminations, accounted for approximately $1.9 billion and $5.1 billion, respectively, of net revenue.

• During the third quarter of 2009, one additional day in the reporting period increased net revenues by approximately $303.2 million, compared to the third quarter of 2008.

Please see the Segment Analysis later in this document for additional information about our net revenues.

Gross profit increased $611.1 million and $1.7 billion during the third quarter and nine months ended September 30, 2009, respectively. As you review our performance in this area, we believe you should consider the following important information:

• During the third quarter and nine months ended September 30, 2009, our gross profit dollars increased as a result of the Longs Acquisition.

• During the third quarter of 2009, one additional day in the reporting period increased gross profit by approximately $61.3 million, compared to the third quarter of 2008.

• During the third quarter and nine months ended September 30, 2009, our gross profit rate was impacted by a higher mix of promotional sales and lower third party reimbursement rates within our Retail Pharmacy segment.

• Our gross profit continued to benefit from the increased utilization of generic drugs (which normally yield a higher gross profit rate than equivalent brand name drugs) in both the Pharmacy Services and Retail Pharmacy segments.

Please see the Segment Analysis later in this document for additional information about our gross profit.

Operating expenses increased $511.4 million and $1.5 billion during the third quarter and the nine months ended September 30, 2009, respectively. As you review our performance in this area, we believe you should consider the following important information:

• During the third quarter and the nine months ended September 30, 2009, operating expenses increased as a result of the Longs Acquisition, including incremental costs associated with the integration of the Longs Drug Stores and RxAmerica.

• During the third quarter of 2009, one additional day in the reporting period increased operating expenses by approximately $35.7 million, compared to the third quarter of 2008.

Please see the Segment Analysis later in this document for additional information about our operating expenses.

Interest expense, net consisted of the following:

                                               Third Quarter Ended                                            Nine Months Ended
In millions                     September 30, 2009             September 27, 2008             September 30, 2009             September 27, 2008
Interest expense               $              123.9            $             117.0           $               397.0           $             372.7
Interest income                                (1.1 )                         (4.3 )                          (4.2 )                       (14.4 )

Interest expense, net          $              122.8            $             112.7           $               392.8           $             358.3

Net interest expense increased $10.1 million and $34.5 million during the third quarter and the nine months ended September 30, 2009, respectively. This was primarily the result of an increase in our average debt balance due to increased borrowings. See "net cash provided by financing activities" under "Liquidity and Capital Resources" later in Management's Discussion and Analysis of Financial Condition and Results of Operations.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Income tax provision - Our effective income tax rate was 29.1% and 36.0% for the third quarter and nine months ended September 30, 2009, respectively, compared to 39.5% and 39.6% for the comparable 2008 periods. The decrease in the effective income tax rate during the third quarter of 2009 was due to the recognition of approximately $155.7 million, or $0.11 per diluted share, of previously unrecognized tax benefits (including accrued interest) relating to the expiration of various statutes of limitation and settlements with tax authorities. Excluding the impact of the recognition of previously unrecognized tax benefits for the third quarter and nine months ended September 30, 2009, respectively, the effective income tax rate for the third quarter and nine months ended September 30, 2009 would have been approximately 39.8%.

Income from continuing operations for the third quarter ended September 30, 2009 increased $204.3 million, or 25.0%, to $1.0 billion (or $0.71 per diluted share), compared to $818.8 million (or $0.56 per diluted share), in the comparable 2008 period. Income from continuing operations for the nine months ended September 30, 2009 increased $264.9 million, or 11.1%, to $2.7 billion (or $1.82 per diluted share), compared to $2.4 billion (or $1.63 per diluted share) in the comparable 2008 period. Income from continuing operations for both the third quarter and nine months ended September 30, 2009 benefited from the $155.7 million income tax benefit described above.

Loss from discontinued operations - In connection with certain business dispositions completed between 1991 and 1997, the Company retained guarantees on store lease obligations for a number of former subsidiaries, including Linens 'n Things. The Company's loss from discontinued operations for the third quarter and nine months ended September 30, 2009 included $1.8 million ($2.9 million, net of a $1.1million income tax benefit) and $9.5 million ($15.5 million, net of a $6.0 million income tax benefit) of lease-related costs, respectively. The loss from discontinued operations for the third quarter and nine months ended September 27, 2008 included $82.8 million ($134.8 million, net of a $52.0 million income tax benefit) and $131.5 million ($213.6 million, net of an $82.1 million income tax benefit) of lease-related costs. See Note 11 to the condensed consolidated financial statements for additional information about our lease guarantees.

Net income for the third quarter ended September 30, 2009 increased $285.3 million or 38.8% to $1.0 billion (or $0.71 per diluted share), compared to $736.0 million (or $0.50 per diluted share) in the comparable 2008 period. Net income for the nine months ended September 30, 2009 increased $386.9 million or 17.1% to $2.6 billion (or $1.81 per diluted share), compared to $2.3 billion (or $1.54 per diluted share) in the comparable 2008 period. Net income for both the third quarter and nine months ended September 30, 2009 benefited from the $155.7 million income tax benefit described above.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Segment Analysis

We evaluate the performance of our Pharmacy Services and Retail Pharmacy segments based on net revenues, gross profit and operating profit before the effect of certain intersegment activities and charges. The Company evaluates the performance of our Corporate segment based on operating expenses before the effect of discontinued operations and certain intersegment activities and charges. The following is a reconciliation of the Company's business segments to the condensed consolidated financial statements:

                                                                                                Intersegment
                               Pharmacy Services       Retail Pharmacy       Corporate          Eliminations           Consolidated
In millions                     Segment (1)(3)           Segment (3)          Segment              (2)(3)                 Totals
Third Quarter Ended
September 30, 2009:
Net revenues                  $          13,030.3     $        13,605.4     $        -         $      (1,993.8 )      $     24,641.9
Gross profit                              1,031.1               3,994.3              -                   (13.7 )             5,011.7
Operating profit (loss)                     799.2                 909.8          (129.4 )                (13.7 )             1,565.9
September 27, 2008(4):
Net revenues                  $          10,563.4     $        11,542.0     $        -         $      (1,242.0 )      $     20,863.4
Gross profit                                892.6               3,508.1              -                    (0.1 )             4,400.6
Operating profit (loss)                     705.6                 865.8          (105.1 )                 (0.1 )             1,466.2
Nine Months Ended
September 30, 2009:
Net revenues                  $          37,573.0     $        40,899.5     $        -         $      (5,565.6 )      $     72,906.9
Gross profit                              2,760.1              12,081.6              -                   (29.8 )            14,811.9
Operating profit (loss)                   2,033.0               2,938.1          (398.4 )                (29.8 )             4,542.9
September 27, 2008(4):
Net revenues                  $          31,984.9     $        35,158.4     $        -         $      (3,813.6 )      $     63,329.7
Gross profit                              2,530.6              10,536.4              -                    (0.2 )            13,066.8
Operating profit (loss)                   1,946.0               2,701.1          (332.5 )                 (0.2 )             4,314.4

(1) Net revenues of the Pharmacy Services segment include approximately $1.7 billion and $1.5 billion of Retail co-payments for the third quarters ended September 30, 2009 and September 27, 2008, respectively. Net revenues of the Pharmacy Services segment include approximately $5.2 billion and $4.7 billion of Retail co-payments for the nine months ended September 30, 2009 and September 27, 2008, respectively.

(2) Intersegment eliminations relate to two types of transactions:
(i) Intersegment revenues that occur when Pharmacy Services segment customers use Retail Pharmacy segment stores to purchase covered products. When this occurs, both the Pharmacy Services and Retail Pharmacy segments record the revenue on a standalone basis and (ii) Intersegment revenues, gross profit and operating profit that occur when Pharmacy Services segment customers, through the Company's intersegment activities (such as the Maintenance Choice Program), elect to pick-up their maintenance prescriptions at Retail Pharmacy segment stores instead of receiving them through the mail. When this occurs, both the Pharmacy Services and Retail Pharmacy segments will record the revenue, gross profit and operating profit on a standalone basis.

(3) When Pharmacy Services segment customers elect to pick-up their maintenance prescriptions at Retail Pharmacy segment stores through the Company's intersegment activities (such as the Maintenance Choice program) instead of receiving them through the mail, both segments record the corresponding revenue, gross profit and operating profit in their respective segment results. As a result, both the Pharmacy Services and the Retail Pharmacy segments include the following results associated with this activity: net revenues of $196.1 million and $450.0 million for the third quarter and nine months ended September 30, 2009, respectively; net revenues of $2.6 million and $3.6 million for the third quarter and nine months ended September 27, 2008,

Management's Discussion and Analysis of Financial Condition and Results of Operations

respectively; gross profit of $13.7 million and $29.8 million for the third quarter and nine months ended September 30, 2009, respectively; gross profit of $0.1 million and $0.2 million for the third quarter and nine months ended September 27, 2008, respectively; operating profit of $13.7 million and $29.8 million for the third quarter and nine months ended September 30, 2009, respectively; and operating profit of $0.1 million and $0.2 million for the third quarter and nine months ended September 27, 2008, respectively.

(4) The results for the third quarter and nine months ended September 27, 2008 have been revised to conform to the current presentation of our reportable segments.

Pharmacy Services Segment

The following table summarizes our Pharmacy Services segment's performance for
the respective periods:



                                          Third Quarter Ended                            Nine Months Ended
                                  September 30,          September 27,          September 30,          September 27,
In millions                           2009                2008(1)(2)                2009                2008(1)(2)
Net revenues                     $      13,030.3        $      10,563.4        $      37,573.0        $      31,984.9
Gross profit                             1,031.1                  892.6                2,760.1                2,530.6
Gross profit % of net
revenues                                     7.9 %                  8.4 %                  7.3 %                  7.9 %
Operating expenses                         231.9                  187.0                  727.1                  584.6
Operating expense % of net
revenues                                     1.8 %                  1.8 %                  1.9 %                  1.8 %
Operating profit                           799.2                  705.6                2,033.0                1,946.0
Operating profit % of net
revenues                                     6.1 %                  6.7 %                  5.4 %                  6.1 %
Net revenues(3):
Mail choice(4)                   $       4,156.5        $       3,619.9        $      12,438.1        $      10,888.7
Pharmacy network(5)                      8,782.2                6,846.2               24,871.4               20,812.0
Other                                       91.6                   97.3                  263.5                  284.2
Pharmacy claims
processed(3):
Total                                      162.9                  149.1                  490.4                  457.1
Mail choice(4)                              16.4                   14.7                   49.3                   44.9
Pharmacy network(5)                        146.5                  134.4                  441.1                  412.2
Generic dispensing rate(3):
Total                                       68.3 %                 65.1 %                 67.9 %                 64.6 %
Mail choice(4)                              56.6 %                 55.2 %                 56.1 %                 54.1 %
Pharmacy network(5)                         69.5 %                 66.1 %                 69.1 %                 65.6 %
Mail choice penetration
rate(6)                                     23.8 %                 23.3 %                 23.8 %                 23.3 %

(1) The third quarter and nine months ended September 27, 2008 have been revised to conform to the current presentation of our Pharmacy Services segment as discussed in the Overview of Our Business section of Management's Discussion and Analysis of Financial Condition and Results of Operations.

(2) The results for the third quarter and nine months ended September 27, 2008 have been revised to conform to the current presentation of the Pharmacy Services segment.

(3) Pharmacy network net revenues, claims processed and generic dispensing rates do not include Maintenance Choice, which are included within the mail choice category.

(4) Mail choice is defined as claims filled at a Pharmacy Services mail facility, which includes specialty mail claims, as well as 90-day claims filled at retail under the Maintenance Choice™ program.

(5) Pharmacy network is defined as claims filled at retail pharmacies, including CVS/pharmacy stores.

(6) Excluding the impact of RxAmerica, the mail choice penetration rate would have been 26.2% for the third quarter of 2009 and for the nine months ended September 30, 2009.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Net revenues - Net revenues increased $2.5 billion, or 23.4%, to $13.0 billion, and $5.6 billion, or 17.5%, to $37.6 billion in the third quarter and nine months ended September 30, 2009, respectively, compared to $10.6 billion and $32.0 billion in the third quarter and nine months ended September 27, 2008, respectively.

As you review our Pharmacy Services segment's revenue performance, we believe you should consider the following important information:

• The Pharmacy Services segment recognizes revenues for its national retail pharmacy network transactions based on individual contract terms. In accordance with ASC 605, Revenue Recognition (formerly Emerging Issues Task Force ("EITF") EITF No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent"), Caremark's contracts are predominantly accounted for using the gross method. Prior to April 2009, RxAmerica's contracts were accounted for using the net method. Effective April 1, 2009, we converted a number of the RxAmerica retail pharmacy network contracts to the Caremark contract structure, which resulted in those contracts being accounted for using the gross method, which increased net revenues during the third quarter and nine months ended September 30, 2009.

• During the third quarter and nine months ended September 30, 2009, the inclusion of RxAmerica's results increased net revenues by approximately $1.0 billion and $2.3 billion, respectively, compared to the third quarter and nine months ended September 27, 2008, respectively. These increases include the conversion of RxAmerica's retail pharmacy network contracts to the Caremark contract structure discussed above.

• During the third quarter of 2009, one additional day in the reporting period increased net revenues by approximately $136.5 million, compared to the third quarter of 2008.

• Our mail choice claims processed increased 11.4% and 9.6% to 16.4 million and 49.3 million claims in the third quarter and nine months ended September 30, 2009, respectively, compared to 14.7 million and 44.9 million claims in the third quarter and nine months ended September 27, 2008, respectively. This increase was primarily due to net new client starts.

• During the third quarter and nine months ended September 30, 2009, our average revenue per mail choice claim increased by 3.1% and 4.2%, respectively, compared to the third quarter and nine months ended September 27, 2008. Specialty mail service claims, which have . . .