CVS conducts strategic review amid financial struggles

According to Modern Healthcare, CVS has been struggling with declining profit margins at its retail pharmacies, as well as rising costs of patient care through its insurance unit Aetna, which generates around a third of the company's revenue. So far, CVS has cut its 2024 earnings forecast for three straight quarters.

The company has also seen changes in its executive leadership. In August, Brian Kane, president of Aetna, left the company after less than a year in his role. CEO Karen Lynch and CFO Tom Cowhey have replaced Kane while CVS searches for his successor.

"We are disappointed by the current performance and outlook for the health-care benefit segment, and I have decided to make leadership changes effective immediately," Lynch said.

Currently, CVS is conducting a strategic review of options, including a potential breakup of its businesses, people familiar with the matter said. CVS has also met with investor Glenview Capital Management to discuss ways to improve the company's operations.

Under the strategic review, one potential plan would split CVS' pharmacy chain and its insurance business into two separate entities. CVS is also discussing whether its pharmacy benefits manager unit should be housed under its retail or insurance units if they were split into two publicly traded companies.

However, these plans are still preliminary, and nothing has been finalized yet, sources said, noting that CVS' board of directors may still decide to go with a different strategy.

So far, CVS has not publicly commented on the strategic review. "CVS's management team and Board of Directors are continually exploring ways to create shareholder value," a company spokesperson said. "We remain focused on driving performance and delivering high quality healthcare products and services enabled by our unmatched scale and integrated model."

Meanwhile, the company is also planning to cut 2,900 jobs as part of a $2 billion cost reduction plan. According to a company spokesperson, the layoffs represent less than 1% of the company's workforce and will primarily impact corporate staff. Frontline employees in pharmacies, stores, and distribution centers will not be impacted.

"Our industry faces continued disruption, regulatory pressures, and evolving consumer needs and expectations, so it is critical that we remain competitive and operate at peak performance," CVS said in a statement. "Before taking this step, we prioritized finding cost savings everywhere we could, including closing open job postings. Decisions on which positions to eliminate were extremely difficult and do not diminish the value that impacted colleagues have brought to the company."

Commentary

According to the Wall Street Journal, it's still not clear whether CVS will break up its businesses since doing so could take away certain benefits that both the retail and insurance units enjoy from being integrated.

It is also unclear whether a vertically integrated health company needs a retail unit. So far, synergies between pharmacies and other healthcare services have not been as smooth as some people may have hoped. For example, both Walmart and Walgreens have been pulling back from primary care after experiencing financial difficulties in their clinics.

"If you put a V-8 engine in your car, it doesn't automatically make it a Ferrari," said Justin Simon, a portfolio manager at the healthcare hedge fund Jasper Capital Management. "You need to fine-tune ways to drive synergies between owning doctors and an insurer."

According to Simon, the leaders in charge of the breakup could clean up CVS' insurance business by leaving a lot of debt with its retail pharmacy unit. Two separate entities could ultimately create more value for investors than an integrated company, Simon said.

Overall, CVS is likely to "sharpen its focus on near-term wins and to be more decisive on communicating its strategy with [Glenview founder Larry] Robbins now publicly involved," said Jonathan Palmer, an analyst with Bloomberg Intelligence. "The challenge is these are highly regulated businesses where changes happen relatively slowly due to contracting. There isn't a quick fix that will make CVS more competitive overnight." (Leigh/Rutherford, Bloomberg/Modern Healthcare, 9/30; Sen, Reuters, 10/1; Eastabrook, Modern Healthcare, 10/1; Logan, Boston Globe/STAT+ [subscription required], 10/1; Wainer, Wall Street Journal, 10/2)

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