CVS Health Undergoes Strategic Review Amidst Slumping Stock and Profits
CVS Health, the healthcare giant, is facing a wellness check as its shares plummet over 20% this year. The company is grappling with higher-than-expected medical costs in its insurance unit and pharmacy reimbursement pressure, among other issues. To address these challenges, CVS has engaged advisors in a strategic review of its business, considering options such as breaking up its retail pharmacy and insurance units.
The potential breakup would be a significant reversal for CVS, which has invested tens of billions of dollars in acquisitions over the last two decades to create a one-stop health destination for patients. However, some analysts believe that a breakup would be challenging and unlikely, as it could lead to lost customers and revenue.
CVS’ vertically integrated business segments, including health insurer Aetna and pharmacy benefits manager Caremark, are intertwined, making it difficult to separate them. Caremark, in particular, sits at the center of the drug supply chain, negotiating drug rebates with manufacturers on behalf of insurers and reimbursing pharmacies for prescriptions.
If CVS stays intact, CEO Karen Lynch and the management team will need to execute major changes to address the company’s financial struggles. The company has already announced a $2 billion cost-cutting plan, which involves laying off nearly 3,000 employees. Analysts believe that recovering margins in the insurance business is key to addressing the company’s financial woes.
CVS’ management team and board of directors are exploring ways to create shareholder value, but the company has declined to comment on rumors of a breakup. Investors may get more clarity on the path forward during the company’s upcoming earnings call in November.
The likelihood of CVS separating its retail pharmacy and insurance segments is low, given the synergies between the three combined businesses. Separating them could come with risks, including lost customers and revenue. Instead, CVS may focus on executing its existing strategy, which includes integrating its recent acquisitions, such as Oak Street Health and Signify Health, into its healthcare business.
The primary care clinic operator Oak Street Health complements Aetna’s Medicare business, offering routine health screenings and diagnoses, among other services. CVS has started to integrate Oak Street Health with its retail pharmacies, opening clinics side-by-side with drugstore locations.
However, building clinics requires significant capital, and the locations typically lose money for several years before becoming profitable. Walgreens, another major retailer, is also struggling in the primary care market and may consider exiting it altogether.
CVS’ operating margin for its pharmacy and consumer wellness business has been declining, largely due to falling reimbursement rates for prescription drugs. Increased competition from Amazon and other retailers, inflation, and softer consumer spending are making it difficult to turn a profit at the front of the store.
The rocky outlook for retail pharmacies could make it challenging for CVS to find a buyer for its drugstores in the event of a split. Instead, a spinoff of CVS’ retail pharmacies might be more likely.
CVS has other assets that would need to be distributed in the event of a breakup, including its fast-growing primary care clinic operator Oak Street Health and in-home healthcare company Signify Health. The company’s strategy is still focused on vertical integration, and executing its existing plan may be the best option for creating shareholder value.
In the meantime, CVS is addressing the ongoing issues on the insurance side of its business, which has fallen short of expectations this year due to higher-than-expected medical costs. The company is confident that the issue is “fixable,” but it will depend on whether CVS can execute the steps it has outlined to improve margins in its insurance unit next year.
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