CVS explores options including potential break-up, sources say

By Anirban Sen

NEW YORK (Reuters) – CVS Health is exploring options that could include a break-up of the company to separate its retail and insurance units, as the struggling healthcare services company looks to turn around its fortunes amid pressure from investors, people familiar with the matter told Reuters.

CVS has been discussing various options – including how such a split would work – with its financial advisers in recent weeks, the sources said, requesting anonymity as the discussions are confidential.

The plan to potentially split the company’s pharmacy chain and the insurance business has been discussed with the board of directors, which is yet to decide on the best course of action for CVS to pursue, the sources said, cautioning that the plans have not been finalized and CVS may opt for a different strategy.

CVS is also discussing whether its pharmacy benefits manager unit, which manages drug benefits for health plans, should be housed within the retail unit or under insurance, if it were to proceed with a separation that could result in two publicly traded companies, the sources said.

Such a move would effectively unwind CVS’s landmark $70 billion takeover of healthcare insurer Aetna in 2017 and come as CVS attempts to navigate one of the most challenging periods in its six-decade history.

A CVS spokesperson declined to comment on whether it is holding talks to explore options.

CVS’s management team and Board of Directors are continually exploring ways to create shareholder value,” the spokesperson said. We remain focused on driving performance and delivering high quality healthcare products and services enabled by our unmatched scale and integrated model.

The latest discussions come as CVS faces increasing pressure from investors such as Glenview Capital, which is said to be pushing for changes at the company to help improve its operations, after it cut its 2024 earnings outlook for a third consecutive quarter in August.

CVS, which has a market value of about $79 billion and held long-term debt of roughly $58 billion at the end of December, in August lowered its annual profit forecast to $6.40 to $6.65 per share, from its previous forecast of least $7.00 per share.

While we view management’s…adjusted EPS growth target for 2025 as attainable, we believe uncertainty around performance in 2024, as well as the outcome of CVS’s 2025 Medicare Advantage bids, creates an unclear outlook for 2025 and beyond,” TD Cowen analysts wrote in an Aug. 11 note.

RISING COSTS, LAGGING SHARE PRICE

CVS recently announced the exit of Aetna head Brian Kane, after its Medicare business, which is for Americans aged 65 and older, underperformed due to rising medical services costs, and initiated a $1 billion cost-cutting plan. Aetna currently generates roughly a third of CVS’s overall revenue.

To be sure, CVS is not the only health insurer facing higher medical costs. UnitedHealth Group flagged increasing costs earlier this year, and Humana in its most recent quarterly earnings suggested that costs would remain elevated for the year.

CVS is led by healthcare industry veteran Karen Lynch, who previously headed the Aetna unit and is temporarily overseeing the business with Chief Financial Officer Tom Cowhey.

The company’s shares have shed nearly a quarter of their value so far this year, underperforming the S&P 500, which has risen nearly 21% during the same period. It is currently trading at a discount to most of its top peers, according to an analysis of LSEG data.

CVS trades at a multiple of seven times earnings before interest, taxes, depreciation and amortization, compared with nearly 14 times for UnitedHealth and roughly nine times for Cigna.

While we realize the medical insurance and PBM operations are facing problems currently, we agree with management, as highlighted last year at its investor day, that the long-term weak link at CVS will likely be its namesake retail pharmacy stores,” said Julie Utterback, an analyst at Morningstar. So unless there is a fix, such as expanding healthcare services in those stores substantially in the near future, a strategic change there may be necessary.

Founded in 1963, CVS has its roots in retail pharmacy, and operates over 9,000 stores primarily in the U.S. CVS has grown its various businesses through several notable acquisitions, including pharmacy benefits manager Caremark, Medicare home health company Signify Health, and Oak Street Health, a primary care provider for Medicare patients.

(Reporting by Anirban Sen in New York; additional reporting by Svea Herbst-Bayliss and Amina Niasse; Editing by Caroline Humer and Leslie Adler)