A sign outside of a CVS pharmacy store on February 07, 2024 in Miami, Florida.
Joe Raedle | Getty Images
It’s time for a wellness check at CVS Health.
Shares of the company are down more than 20% this year as it grapples with higher-than-expected medical costs in its insurance unit and pharmacy reimbursement pressure, among other issues.
As it seeks to claw back faith with Wall Street, the company is considering breaking itself up.
CVS has engaged advisors in a strategic review of its business, CNBC reported Monday. One option being weighed is splitting up its retail pharmacy and insurance units. It would be a stunning reversal for the company, which has spent tens of billions of dollars on acquisitions over the last two decades to turn itself into a one-stop health destination for patients.
Some analysts contend that a breakup of CVS would be challenging and unlikely.
CVS risks losing customers and revenue if it splits up its vertically integrated business segments, which includes health insurer Aetna and the major pharmacy benefits manager Caremark. That could translate to more lost profits for a health-care giant that has slashed its full-year 2024 earnings guidance for three consecutive quarters.
“There really is no perfect option for a split,” said eMarketer senior analyst Rajiv Leventhal, who believes a breakup is still a possibility. “If that does happen, one side of the split becomes really successful and prosperous, and the other would significantly struggle.”
Notably, CVS executives on Monday met with major shareholder Glenview Capital to discuss how to fix the flailing business and recover its stock, CNBC previously reported. But Glenview on Tuesday denied rumors that it is pushing to break up the company.
If CVS stays intact, CEO Karen Lynch and the rest of the management team will have to execute major changes to address what industry experts say are glaring issues battering its bottom line and stock price.
The company has already undertaken a $2 billion cost-cutting plan, announced in August, to help shore up profits. CVS on Monday said that plan involves laying off nearly 3,000 employees.
Some analysts said the health-care giant must prioritize recovering the margins in its insurance business, which they believe is the main issue weighing on its stock price and financial guidance for the year. That pressure drove a leadership change earlier this year, with Lynch assuming direct oversight of the company’s insurance unit in August, displacing then-President Brian Kane.
CVS’ management team and board of directors “are continually exploring ways to create shareholder value,” a company spokesperson told CNBC, declining to comment on the rumors of a breakup.
“We remain focused on driving performance and delivering high quality healthcare products and services enabled by our unmatched scale and integrated model,” the spokesperson said in a statement.
Investors may get more clarity on the path forward for the company during its upcoming earnings call in November.
UnitedHealth Group, Cigna and Humana, also have their own PBMs, said eMarketer’s Leventhal.
But Caremark, in some cases, also funnels drug prescriptions to CVS retail pharmacies, he said. That has helped the company’s drugstores gain meaningful prescription market share over its chief rival, Walgreens, which has been struggling to operate as a largely stand-alone pharmacy business.
CVS is the top U.S. pharmacy in terms of prescription drug revenue, holding more than 25% of the market share in 2023, according to Statista data released in March. Walgreens trailed behind with nearly 15% of that share last year.
Now, CVS drugstores must maintain an edge over competitors at a time when the broader retail pharmacy industry faces profitability issues, largely due to falling reimbursement rates for prescription drugs. Increased competition from Amazon and other retailers, inflation, and softer consumer spending are making it more difficult to turn a profit at the front of the store. Meanwhile, burnout among pharmacy staff is also putting pressure on the industry.
CVS’ operating margin for its pharmacy and consumer wellness business was 4.6% last year, up from 3.3% in 2022 but down from 8.5% in 2019 and 9.9% in 2015.
CVS and Walgreens have both pivoted from years of endless retail drugstore store expansions to shuttering hundreds of locations across the U.S. CVS is wrapping up a three-year plan to close 900 of its stores, with 851 locations shuttered as of August.
The rocky outlook for retail pharmacies could make it difficult for CVS to find a buyer for its drugstores in the event of a split, according to Tanquilut. He said a spinoff of CVS’ retail pharmacies would be more likely.
“There’s a reason they’re cutting down stores. Why break it up when the relationship between Caremark and CVS retail is what keeps it outperforming the rest of the pharmacy peer group?” Tanquilut said.
$10.6 billion last year, and Signify Health, an in-home health-care company that CVS bought for about $8 billion in 2022. Those deals aimed to build on CVS’ major push into health care – a strategy that Walgreens and other retailers have also pursued over the last few years.
Oak Street Health could theoretically be spun out with Aetna in the case of a split, Mizuho managing director Ann Hynes wrote in a research note Tuesday.
