Why a potential CVS breakup matters
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A CVS breakup — which reportedly is on the table — would be pretty hard to actually do and could come with a lot of downsides, and most people seem skeptical it'll happen.
- But the fact that it's being discussed at all is notable in an era where vertical integration is all the rage.
Why it matters: Though CVS's woes may seem very specific to the company and its unique compilation of business lines, they overlap with some industrywide risks and suggest that not all consolidation strategies are created equal.
The big picture: CVS is now a chain of retail pharmacy stores, a major health insurer, the country's largest pharmacy benefit manager and the employer of thousands of providers.
- The argument for this vertical integration, in economist-speak, is that the different parts of the business work together to create efficiencies and, ultimately, better patient value.
- That interdependency between different parts of the company is one big reason — among many — for analysts' skepticism that a breakup will actually happen.
- "If CVS gets rid of a bunch of assets that the other big players don't have, do they ultimately just look exactly like the other big players? And what's your competitive advantage at this point?" said Craig Garthwaite, a professor at Northwestern's Kellogg School of Management.
"CVS Health's management team and Board of Directors are continually exploring ways to create shareholder value," CVS said in a statement. "We remain focused on driving performance and delivering high quality health care products and services enabled by our unmatched scale and integrated model."
- The breakup conversation spilled into public view amid pressure from hedge fund Glenview Capital Management, which per Bloomberg denied pushing for a breakup of CVS but said it is offering suggestions for improving operations.
- The company confirmed via a spokesperson that it plans to cut around 2,900 jobs to reduce costs.
But that integration also makes the more successful units of the company vulnerable to the pressures being faced by the lower-performing ones, which is the heart of CVS's current problems. Plus, creating efficiencies is easier said than done.
- "Bigger is more complicated, so the other thing we can't ignore is the managerial complexity of running a health care conglomerate," said Yale economist Zack Cooper.
- "Part of the story you're seeing is the efficiency gains are pretty hard. They're hard managerially. And I think some of the ideas that look good on paper turn out to be very hard in practice," he added.
Between the lines: CVS is dealing with Medicare Advantage-related problems, and it's far from alone in its struggles. But its bigger issue may be with the retail pharmacy chain that everyone associates with its name.
- The performance of the company's health benefits arm "has been the biggest deviation from the typical trend line in 2024. However, retail has long been the asset that has the most operating pressure," even though it has hit its metrics in 2024, said Michael Cherny, a senior research analyst at Leerink Partners.
- Rather than fitting into some larger narrative, some experts say, CVS's issue could just be the specific businesses it has combined.
- "These challenges are not applicable to all health care integrated businesses," said Johns Hopkins professor Ge Bai. Combining businesses that include a pharmacy doesn't help establish market power the same way that including physicians does, she added.
Retail pharmacy in general is struggling in light of competition and other pressures — just look at Walgreens' stock.
- The question is what value having the pharmacy attached adds to CVS's other business lines, especially Aetna, and some experts are more skeptical than others.
- "You've got a loss-leading business tacked onto something else with no path to have a 2 plus 2 equals 5 situation. There's no additive value to having the two attached together," Cooper said.
- On the company's most recent earnings call, CEO Karen Lynch said that among its stand-alone stores, "substantially all are profitable."
What we're watching: Analysts suggested the simplest path forward would be, rather than breaking up, to improve the Aetna side of things.
- "The 'fix' from here for CVS seem clear if not simple: better execution at Aetna," wrote Raymond James analysts in a note. "It's not exciting, but grinding out margin improvement and debt reduction seem like the best way out to us."
- The big problem with that: the federal government, which is generally trying to crack down on what some see as overspending on MA.
