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CEO's Shareholder Letter

Larry J. Merlo

Dear Fellow Shareholders:

Health care costs in the United States are rising at a remarkable pace,
driven in large part by an aging population and the increased prevalence of chronic disease. To address today’s challenges and play a larger role
in the evolution of health care, CVS Health has assembled a unique suite of assets that allows us to deliver
superior outcomes at a lower cost. Beyond their formidable standalone capabilities, we’ve integrated these assets to fill unmet needs and create opportunities to redefine health care for all our stakeholders.

Our planned acquisition of Aetna, one of the nation’s leading diversified health care benefits companies, represents another leg of this journey. Through our unmatched patient touchpoints, CVS Health already owns the “front door” of our customers’ health care experience. Our combined companies will help to remake this experience, integrating more closely the work of doctors, pharmacists, other health care professionals, and health benefits companies. The deal is still going through regulatory approvals, and we currently anticipate it closing during the second half of 2018.

Revenue continued to rise in 2017, with progress made on plan for sustainable earnings growth

Before going into more detail on our accomplishments and challenges, I’ll first provide a brief overview of the past year’s financial performance. Net revenue for the year increased by 4.1 percent to a record $184.8 billion, with adjusted earnings per share up slightly at $5.90. I’m happy to report that we have also made meaningful gains in the four-point plan we laid out in 2016 to generate more robust levels of earnings growth in the years ahead. Let me highlight some key steps in the progress we have made. First, CVS Pharmacy® has partnered more broadly with pharmacy benefits managers (PBMs) and health plans. Our network arrangements with Cigna, OptumRx, and Express Scripts, as well as expanded Medicare Part D preferred network arrangements, should drive meaningful growth in CVS Pharmacy prescription volumes. On the innovation front, we continued to introduce PBM products-such as Transform Diabetes Care™-that lower client costs while improving care for members. We also unveiled a new performance-based pharmacy network that is anchored by CVS Pharmacy, Walgreens, and up to 10,000 independent pharmacies. The network is designed not only to deliver unit cost savings, but also to improve clinical outcomes that will help lower overall health care costs. And through real-time benefits, we are putting member-specific formulary information at the prescriber’s fingertips. This allows doctors to select clinically appropriate alternatives that may also cost members less. Third, we finished the first year of our enterprise streamlining initiative and are on track to generate cumulative savings of $3 billion by 2021. Among our accomplishments, we have simplified the dispensing process by sharing workload across our mail, retail, and long-term care pharmacy platforms. We are also implementing processes to simplify claims adjudication, enrollment, benefit verification, and related client services. Finally, we used our cash flow to return $6.4 billion to shareholders through share repurchases and dividends in 2017. Due to the pending Aetna acquisition, we suspended our share repurchase program during the fourth quarter of 2017 and plan to maintain our current annual dividend of $2.00 per share in 2018.

Differentiated PBM offerings drive customer satisfaction and new business wins

Our PBM, CVS Caremark®, delivered solid growth in 2017, with increases in both revenue and operating profit. Since 2014, we have achieved a 13.9 percent compound annual growth rate (CAGR) for PBM revenue with a 10.6 percent CAGR for operating profit. Turning to 2018, we estimate that PBM net revenues will climb to approximately $134 billion while operating profit for the segment will approach $5 billion. Innovative offerings led to another outstanding selling season, with gross new business wins totaling $6.2 billion for 2018. That figure represents nearly half of all the business that switched PBMs in the latest selling season, with government and union clients accounting for the largest share of new business. Despite the fact that fewer health plans moved to a new PBM, this segment still added nearly $2 billion in revenue. Along with these gains, our PBM recorded a retention rate surpassing 96 percent. That is due in no small part to a continued rise in client satisfaction among the 94 million lives we serve. Moreover, our ability to retain clients has resulted in significant gains in enterprise dispensing. Over time we have developed new plan designs that save our clients money while simultaneously moving share into our channels. For example, the new plan members we enrolled over the past three selling seasons will contribute an additional 40 million prescriptions to the enterprise in 2018. With brand inflation, an aging population, and the rising utilization of specialty drugs, clients depend on us more than ever to slow the rate of drug spending growth—or “trend.”

In 2017, we succeeded in reducing trend for commercial clients from 3.2 percent in 2016 to 1.9 percent, the lowest level in five years. We accomplished this through a variety of increasingly sophisticated cost-management strategies, such as our advanced approach to formularies and new or enhanced pharmacy networks. Among other innovations, we are enhancing our flagship Maintenance Choice® product by making it available to a broader range of clients, including fully insured health plans. By giving their members the option of getting 90-day prescriptions at our stores or by mail, we expect to save them money and improve adherence rates. Additionally, we’ve enhanced member benefits with the launch of on-demand home delivery, as well as the rollout of a digital tool that makes it easier to transfer a prescription into our network. Medicare and Medicaid remain important growth drivers, both for CVS Health and our payor clients. Our SilverScript Insurance Company subsidiary, the nation’s largest standalone Medicare Part D Prescription Drug Plan, continued to perform well in the marketplace. We have built deep expertise in Medicare quality and delivery through our support of 6.1 million members. For the third consecutive year, SilverScript earned four stars (out of a maximum of five) on the government’s annual quality measurement system. When you include our health plan clients, we support more than 13 million Medicare members. Our differentiated services offer clients a competitive advantage to help their businesses grow. Along with operational and consultative services, we make formulary and plan design recommendations, and also help prepare their annual bids to the Centers for Medicare and Medicaid Services.

The industry’s largest specialty pharmacy leads the way with multiple innovations

At CVS Specialty®, revenue from prescriptions we dispense and manage rose 12 percent to $57 billion in 2017. Since 2013, dispensing revenue has increased at a 27 percent CAGR to $35 billion. We remain the largest specialty pharmacy by a considerable margin, resulting in greater scale and stronger purchasing economics.

PBM clients value the breadth and depth of our specialty management innovations, which include Accordant nurse case management services, Coram infusion services, and our NovoLogix medical benefit management system. A key differentiator, NovoLogix has helped us win 70 percent of the standalone specialty contracts that have changed hands over the past three years. It currently has 65 million lives under management — spread across 31 health plans-delivering an estimated savings of $2.1 billion to our clients.

Despite moderating brand drug inflation, the rising significance of specialty generics and biosimilars, and other dynamics that are expected to slow specialty growth, specialty will remain the pharmacy industry’s fastest-growing segment. Specialty’s clinical, administrative, and logistical complexities create opportunities for us to differentiate on price, product, and services. Looking at 2018, we expect to continue outpacing the marketplace by adding another $4 billion in specialty revenue.

Innovation will play a key role in our specialty growth, and we have focused on applying it across three areas: driving optimal adherence, streamlining the prescribing process, and managing high-cost disease states. For example, our predictive analytics pilot is helping us understand why any given individual is non-adherent, allowing us to adjust the timing of our interventions and the methodologies we use to close gaps in care.

Our Specialty Connect® solution, which allows for pick-up or drop-off of specialty prescriptions at our retail locations, was among our first and most successful efforts at simplifying the specialty patient experience. The ability to integrate with electronic health record systems is now helping us streamline the often-challenging prior authorization process so that physicians get their patients started on specialty therapies more rapidly.

CVS Pharmacy remains focused on making pharmacy and everyday health care better for consumers

Flat same store prescription volumes, along with reimbursement pressure and generic introductions, led to a 2.6 percent decline in same store sales in 2017. On the plus side, prescriptions grew in our Target pharmacies thanks to the strength of our patient care programs and Maintenance Choice. CVS Pharmacy locations fill 1.1 billion prescriptions annually, and our share of U.S. retail prescriptions exceeds 23 percent. CVS Caremark members have certainly helped us capture market share, but we have also strengthened our relationships with other PBMs and payors. For example, OptumRx has made us the exclusive provider of 90-day in-store prescriptions for one of its networks, and we are also a preferred pharmacy in the Express Scripts diabetes network.

In 2018, we expect to see same store prescription volumes rise by at least 6 percent, driven primarily by these broader partnerships with PBMs and health plans, as well as our expanded participation as a preferred pharmacy in a greater number of Medicare Part D networks. We anticipate same store sales growth in the range of 2 percent to 3.5 percent.

We remain focused on making pharmacy and everyday health care better for consumers, and we have the physical and digital assets that customers demand. Our 9,800 retail locations make ours the largest U.S. pharmacy chain, with nearly 70 percent of the population living within three miles of a store. In 2017, our 30,000 retail pharmacists provided more than 140 million face-to-face consultations with customers to discuss dosages, timing, and side effects. We have also expanded delivery options with nationwide next-day delivery and same-day delivery in select cities.

Because approximately 50 percent of people do not continue prescriptions as prescribed, we have built the industry’s leading patient care platform. This includes new script pick-up counseling, adherence outreach calls, gaps in care counseling, prescription care counseling, and, where appropriate, helping customers move from 30- to 90-day prescriptions.

We’re adding valuable services at retail and investing in the front-store shopping experience

Beyond pharmacy, we are adding new services to our stores with the goal of enhancing our position as the front door to consumer health. We already operate more than 1,100 MinuteClinic® locations in 33 states and are expanding its offerings to include monitoring and treatment of diabetes, hypertension, high cholesterol, and thyroid disorders. We will also begin rolling out audiology and optical centers in select locations in 2018 following successful pilots. Both offer significantly greater productivity per square foot than comparable areas of our average stores.

In the front of the store, we are driving growth by making investments that improve the shopping experience. For example, by the end of 2018 we will have reset nearly 2,000 stores to our popular health and beauty format. Stores that we have already converted are showing an average of 2.5 percent gain in sales as well as improved profitability from their emphasis on these two high-margin categories. Among our other resets and refreshes, we will convert an additional 350 locations to the CVS Pharmacy y más® format to better serve the fast-growing Hispanic market.

We are able to identify optimal reset candidates in part through the many insights we have gained from ExtraCare® card users. Launched back in 2001, ExtraCare today has 62 million actively engaged customers. It is supported by a broad range of technologies that help us target and engage high-value shoppers with the right offers—both in the store and digitally—and adjust to changes in consumer behavior. In 2017, cardholders earned $3.6 billion in ExtraCare rewards and savings.

CVS Health has made addressing the opioid epidemic a cornerstone of our social responsibility initiatives

You can read about some of our social responsibility and sustainability initiatives on pages 6 and 7. I do want to touch on just a couple here, starting with our response to the opioid epidemic. This has become one of the greatest public health threats facing our country, and we owe it to our patients and communities to help provide solutions.

CVS Health has been working with policymakers across the country to increase access to naloxone, the medication that rapidly reverses opioid overdose. In early 2018, we also introduced an enhanced opioid utilization management program that limits the supply of opioids dispensed to seven days for certain acute prescriptions for patients who are new to therapy. It also limits the daily dosage of opioids dispensed, based on the strength of the opioid, and requires the use of immediate-release formulations of opioids before extended-release opioids are dispensed. Initial results of this program show that the number of patients new to opioid therapy with an acute condition who received more than a seven-day supply decreased by 70 percent.

I also want to acknowledge here the outstanding work of our colleagues who helped ensure that customers in Florida, Texas, and Puerto Rico received vital medications both before and after the hurricanes that devastated their communities in 2017. CVS Health colleagues played a critical role in supporting so many of our outreach initiatives. We have proudly supported rebuilding efforts through a $4 million in-store fundraising campaign, along with the donation of more than $7 million worth of critical products and supplies. For a comprehensive review of our efforts, I encourage you to visit CVSHealth.com to download the newly published CVS Health 2017 Corporate Social Responsibility Report.

In closing, I want to thank our board of directors, our shareholders, and the more than 240,000 colleagues who support our vision for the future of health care delivery. If you haven’t already done so, I encourage you to read the pages that preceded this letter to learn more about the unique capabilities that allow CVS Health to improve care, lower costs, and transform the patient experience.

Larry signature
Larry J. Merlo
President and Chief Executive Officer
February 14, 2018