Fitch Ratings Upgrades CVS Caremark Corp.'s IDR to 'BBB+'; Outlook Stable

Business Wire, June 27, 2008

NEW YORK -- Fitch Ratings has upgraded its ratings on CVS Caremark Corp. (NYSE:CVS) as follows:

--Long-Term Issuer Default Rating (IDR) to 'BBB+' from 'BBB';

--Senior unsecured bank facility to 'BBB+' from 'BBB';

--Senior unsecured notes to 'BBB+' from 'BBB';

--ECAPS hybrid security to 'BBB' from 'BBB-'.

In addition, Fitch has affirmed the following rating:

--Short-Term IDR 'F2';

--Commercial paper 'F2'.

The Rating Outlook is Stable. CVS had $9.7 billion in debt outstanding as of March 29, 2008.

The upgrades reflect CVS's continued strong comparable sales growth and operating margin improvement which have led to solid free cash flow generation and improved credit metrics. The ratings consider the company's scale and strong brand recognition, leading market shares and operating metrics, its successful track record of integrating acquisitions, as well as the recession-resistant nature of drugstore retailing. Of concern is the risk of integrating the Caremark pharmacy benefit management business (PBM), lower industry script trends due to the lack of new drugs and higher co-pays, and potential cuts in prescription reimbursement rates.

CVS is well-positioned in all prescription distribution channels - retail, mail and specialty - and is the largest provider of prescriptions in the U.S. with an approximately 19% share of 2007 prescription volume. Fitch expects CVS to continue to drive share gains and capitalize on positive industry dynamics such as increasing utilization of drugs by seniors, the continued growth in higher-margined generics and growth in specialty. The company is also working on several new initiatives to leverage its integrated platform that could generate incremental revenue longer term.

Of the traditional drugstore market (pharmacy and front-end sales at chains and independents), CVS has a 23% share (based on NACDS estimates for year end 2007 sales for all traditional drug stores) on a store base of over 6,300 stores. It has one of the highest sales productivity metrics in the industry, with annual retail sales per square foot of over $820 versus approximately $670 on average for its publicly traded peers. The company has a successful track record of integrating large scale retail acquisitions over the past ten years, while maintaining a healthy level of growth and improving profitability on an organic basis. Retail operating EBIT margins have improved to 6.0% in 2007 from 5.2% in 2003 on strong organic comparable store sales growth, operational efficiencies and contribution from generics, in spite of acquiring close to 2,000 less productive Eckerd and Osco/Savon stores. The acquired stores have seen strong traction in both sales and margins and CVS Caremark has realized strong purchasing and overhead synergies. Fitch continues to expect healthy growth in the retail business from comparable store sales and organic square footage growth as well as ongoing improvement at acquired units.

With its acquisition of Caremark Corporation in March 2007, CVS is the second largest PBM in the U.S., with 2007 proforma PBM revenue of $43.3 billion, just shy of Medco Health Solutions' revenue of $44.5 billion. The company has realized strong purchasing synergies on a total revenue base that has almost doubled to $84 billion in 2007 on a proforma basis. The acquisition also solidified CVS's leadership position in the specialty market, the fastest growing segment in prescription sales, which should be a positive contributor to top line growth going forward. Continued risks include integrating the Caremark PBM business, such as a loss of focus on its core retailing business and any disruption from consolidating facilities or integrating pharmacy systems, as well as any net losses of large PBM contracts.

In the intermediate term, Fitch expects CVS to focus primarily on organic growth and pursue small acquisitions to strengthen local market shares in the retail business or build competencies in the specialty or PBM segments. This is due to its leadership positions in all prescription channels and the lack of large scale acquisition opportunities in its operating segments. Fitch expects both the retail and the pharmacy services businesses to contribute to strong free cash generation, which can be used towards a combination of debt paydown and share buybacks. As a result, credit metrics are expected to improve from 2.7x adjusted debt/EBITDAR and 3.8x EBITDAR/interest + rents for the latest twelve months ending March 29, 2008. However, significant share buyback activity could preclude CVS Caremark from deleveraging the balance sheet.

The ratings on the Enhanced Capital Advantaged Preferred Securities (ECAPS) reflect their junior subordinated position in the capital structure, their cumulative optional deferral feature, their long effective maturity, and lack of restrictive covenants. As a result, Fitch has assigned a 75% equity credit to these securities, as is outlined in Fitch's updated criteria report 'Equity Credit for Hybrids & Other Capital Securities' dated June 25, 2008 and available on the Fitch Ratings web site at www.fitchratings.com.