An indication exterior of a CVS pharmacy retailer on February 07, 2024 in Miami, Florida.
Joe Raedle | Getty Photos
It’s time for a wellness test at CVS Well being.
Shares of the corporate are down greater than 20% this yr because it grapples with higher-than-expected medical prices in its insurance coverage unit and pharmacy reimbursement strain, amongst different points.
Because it seeks to claw again religion with Wall Road, the corporate is contemplating breaking itself up.
CVS has engaged advisors in a strategic evaluate of its enterprise, CNBC reported on Monday. One possibility being weighed is splitting up its retail pharmacy and insurance coverage models. It could be a surprising reversal for the corporate, which has spent tens of billions of {dollars} on acquisitions during the last 20 years to show itself right into a one-stop well being vacation spot for sufferers.
Some analysts contend {that a} breakup of CVS can be difficult and unlikely.
CVS dangers shedding clients and income if it splits up its vertically built-in enterprise segments, which incorporates well being insurer Aetna and the foremost pharmacy advantages supervisor Caremark. That would translate to extra misplaced earnings for a healthcare large that has slashed its full-year 2024 earnings steerage for 3 consecutive quarters.
“There actually is not any excellent possibility for a cut up,” mentioned eMarketer senior analyst Rajiv Leventhal, who believes a breakup continues to be a chance. “If that does occur, one aspect of the cut up turns into actually profitable and affluent, and the opposite would considerably battle.”
Notably, CVS executives on Monday met with main shareholder Glenview Capital to debate repair the flailing enterprise and get better its inventory, CNBC beforehand reported. However Glenview on Tuesday denied rumors that it’s pushing to interrupt up the corporate.
If CVS stays intact, CEO Karen Lynch and the remainder of the administration group must execute main adjustments to handle what trade consultants say are evident points battering its backside line and inventory value.
The corporate has already undertaken a $2 billion cost-cutting plan CVS, introduced in August, to assist shore up earnings. CVS on Monday mentioned that plan entails shedding almost 3,000 staff.
Some analysts mentioned the healthcare large should prioritize recovering the margins in its insurance coverage enterprise, which they imagine is the principle situation weighing on its inventory value and monetary steerage for the yr. That strain drove a management change earlier this yr, with Lynch assuming direct oversight of the corporate’s insurance coverage unit in August, displacing then-president Brian Kane.
CVS’ administration group and board of administrators “are regularly exploring methods to create shareholder worth,” an organization spokesperson informed CNBC, declining to touch upon the rumors of a breakup.
“We stay centered on driving efficiency and delivering top quality healthcare services and products enabled by our unmatched scale and built-in mannequin,” the spokesperson mentioned in a press release.
Buyers might get extra readability on the trail ahead for the corporate throughout its upcoming earnings name in November.
Some analysts mentioned the probability of CVS separating its retail pharmacy and insurance coverage segments is low given the synergies between the three mixed companies. Separating them may include dangers, they added.
“The technique itself continues to be vertical integration,” Jefferies analyst Brian Tanquilut informed CNBC. “The execution may not have been the best, however I feel it’s somewhat too early to actually conclude that it’s a damaged technique.”
A lot of CVS’ purchasers contract with the corporate throughout its three enterprise models, in response to Evercore ISI analyst Elizabeth Anderson. Anderson mentioned “carving out and pulling aside an entire contract” within the occasion of a breakup is perhaps “fairly tough operationally” and result in misplaced clients and income.
Pharmacy advantages managers like CVS’ Caremark sit on the middle of the drug provide chain within the U.S., negotiating drug rebates with producers on behalf of insurers, creating lists of most popular medicines lined by well being plans and reimbursing pharmacies for prescriptions.
Which means Caremark additionally sits on the intersection of CVS’ retail pharmacy operation and its Aetna insurer, boosting the aggressive benefit of each of the companies. Within the occasion of a breakup, it’s not clear the place Caremark would fall.
A staff shares the cabinets in a CVS pharmacy retailer on February 07, 2024 in Miami, Florida.
Joe Raedle | Getty Photos
Separating Caremark from Aetna would put the insurance coverage enterprise at a aggressive drawback since all of its largest rivals, together with UnitedHealth Group, Cigna and Humana, even have their very own PBMs, mentioned eMarketer’s Leventhal.
However Caremark, in some instances, additionally funnels drug prescriptions to CVS retail pharmacies, he mentioned. That has helped the corporate’s drugstores achieve significant prescription market share over its chief rival, Walgreens, which has been struggling to function as a largely standalone pharmacy enterprise.
CVS is the highest U.S. pharmacy when it comes to prescription drug income, holding greater than 25% of the market share in 2023, in response to Statista knowledge launched in March. Walgreens trailed behind with almost 15% of that share final yr.
Now, CVS drugstores should preserve an edge over rivals at a time when the broader retail pharmacy trade faces profitability points, largely because of falling reimbursement charges for pharmaceuticals. Elevated competitors from Amazon and different retailers, inflation and softer client spending are making it tougher to show a revenue on the entrance of the shop. In the meantime, burnout amongst pharmacy employees can be placing strain on the trade.
CVS’ working margin for its pharmacy and client wellness enterprise was 4.6% final yr, up from 3.3% in 2022 however down from 8.5% in 2019 and 9.9% in 2015.
CVS and Walgreens have each pivoted from years of limitless retail drugstore retailer expansions to shuttering a whole bunch of places throughout the U.S. CVS is wrapping up a three-year plan to shut 900 of its shops, with 851 places closed as of August.
The rocky outlook for retail pharmacies may make it tough for CVS to discover a purchaser for its drugstores within the occasion of a cut up, in response to Tanquilut. He mentioned a derivative of CVS’ retail pharmacies can be extra probably.
“There’s a motive they’re slicing down shops. Why break it up when the connection between Caremark and CVS retail is what retains it outperforming the remainder of the pharmacy peer group?” Tanquilut mentioned.
CVS has different property that may must be distributed within the occasion of a breakup.
That features two current acquisitions: fast-growing major care clinic operator Oak Road Well being, which the corporate acquired for $10.6 billion final yr, and Signify Well being, an in-home healthcare firm that CVS purchased for about $8 billion in 2022. These offers aimed to construct on CVS’ main push into healthcare – a method that Walgreens and different retailers have additionally pursued over the previous couple of years.
Oak Road Well being may theoretically be spun out with Aetna within the case of a cut up, Mizuho managing director Ann Hynes wrote in a analysis word Tuesday.
An Oak Road Well being clinic stands in a Brooklyn neighborhood on February 08, 2023 in New York Metropolis.
Spencer Platt | Getty Photos
The first care clinic operator enhances Aetna’s Medicare enterprise as a result of it takes care of older adults, providing routine well being screenings and diagnoses, amongst different providers. CVS additionally sells Aetna well being plans that supply reductions when sufferers use the corporate’s medical care suppliers.
However CVS has additionally began to combine Oak Road Well being with its retail pharmacies. The corporate has opened these major care clinics side-by-side with some drugstore places in Texas and Illinois, with plans to introduce round two dozen extra within the U.S. by the top of the yr.
A number of corporations, together with Amazon, Walmart, CVS and Walgreens, are feeling the ache from bets on major care. That’s as a result of constructing clinics requires numerous capital, and the places usually lose cash for a number of years earlier than turning into worthwhile, in response to Tanquilut.
Walgreens may probably exit that market altogether. The corporate mentioned in a securities submitting in August it’s contemplating a sale of its major care supplier VillageMD.
However Tanquilut mentioned it could not make sense for CVS to promote Oak Road Well being or Signify Well being as a result of “they’re really hitting their numbers.”
Signify noticed 27% year-over-year income development within the second quarter, whereas Oak Road gross sales grew roughly 32% in comparison with the identical interval final yr, reflecting robust affected person membership, CVS executives mentioned in an earnings name in August.
Oak Road ended the quarter with 207 facilities, a rise of 30 facilities from final yr, executives added.
“Why do away with them once they’re nonetheless strategic in nature?” Tanquilut informed CNBC, including that it might be tough to discover a purchaser for Oak Road given the tough marketplace for major care facilities.
If CVS doesn’t endure a breakup, the “single finest value-creating alternative” for the corporate is addressing the continued points on the insurance coverage aspect of the enterprise, in response to Leerink Companions analyst Michael Cherny.
He mentioned the section’s efficiency has fallen wanting expectations this yr because of higher-than-expected medical prices — by far the largest hit to the corporate’s monetary 2024 steerage and inventory efficiency, he mentioned. Cherny mentioned he’s assured the difficulty is “fixable,” however it should depend upon whether or not CVS can execute the steps it has already outlined to enhance margins in its insurance coverage unit subsequent yr.
Aetna consists of plans for the Inexpensive Care Act, Medicare Benefit and Medicaid, in addition to dental and imaginative and prescient. Medical prices from Medicare Benefit sufferers have jumped during the last yr for insurers as extra seniors return to hospitals to endure procedures they’d delayed in the course of the pandemic, similar to hip and joint replacements.
Medicare Benefit, a privately run medical health insurance plan contracted by Medicare, has been a key supply of development and earnings for the broader insurance coverage trade. Greater than half of Medicare beneficiaries are enrolled in these plans as of 2024, enticed by decrease month-to-month premiums and additional advantages not lined by conventional Medicare, in response to well being coverage analysis group KFF.
However buyers are actually involved in regards to the skyrocketing prices from Medicare Benefit plans, which insurers warn might not come down anytime quickly.
A basic view reveals an indication of CVS Well being Buyer Assist Middle in CVS headquarters of CVS Well being Corp in Woonsocket, Rhode Island, U.S. October 30, 2023.
Religion Ninivaggi | Reuters
Cherny mentioned CVS confronted a “double whammy” in Medicare Benefit this yr, grappling with extra membership development at a time when many seniors are utilizing extra advantages.
In August, CVS additionally mentioned its lowered full-year outlook mirrored a decline within the firm’s Medicare Benefit star scores for the 2024 cost yr.
These essential scores assist sufferers evaluate the standard of Medicare well being and drug plans and decide how a lot an insurer receives in bonus funds from the Facilities for Medicare and Medicaid Companies. Plans that obtain 4 stars or above obtain a 5% bonus for the next yr and have their benchmark elevated, giving them a aggressive benefit of their markets.
Final yr, CVS projected it might lose as much as $1 billion in 2024 because of decrease star scores, the corporate disclosed in a securities submitting.
However issues might begin to lookup in 2025.
One of many firm’s giant Medicare Benefit contracts regained its four-star ranking, which is able to “create an incremental tailwind” in 2025, CVS executives mentioned in August.
“We’re giving them the good thing about the doubt as a result of we all know that the celebs ranking bonus funds will come again in 2025,” Tanquilut mentioned.
Throughout a convention In Could, CVS mentioned it might pursue a “margin over membership” technique: CVS CFO Tom Cowhey mentioned the corporate is ready to lose as much as 10% of its present Medicare members subsequent yr in an effort to get its margins “again on monitor.”
The corporate will make vital adjustments to its Medicare Benefit plans for 2025, similar to rising copays and premiums and slicing again sure well being advantages. That can eradicate the bills tied to these advantages and drive away sufferers who want or need to use them.
These actions will assist the corporate obtain its goal of 100- to 200-basis-points margin enchancment in its Medicare Benefit enterprise, CVS executives mentioned in August.