Exclusive-CVS is exploring options, including a potential breakup, sources say By Reuters

By Anirban Sen

NEW YORK (Reuters) – CVS Health is exploring options that could include breaking up the company to separate its retail and insurance units, as the struggling health care company seeks to turn around its fortunes amid pressure from side 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 because the discussions are confidential.

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

CVS is also debating whether its pharmacy benefit manager unit, which manages drug benefits for health plans, should be housed in the retail unit or under insurance if it were to pursue a spin-off that could leads to two publicly traded companies, the sources said. .

Such a move would effectively reverse CVS’s $70 billion takeover of health care insurer Aetna in 2017 and would come as CVS tries to navigate one of the most difficult periods in its six-decade history.

A CVS spokesman declined to comment on whether it is in 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 powered by our integrated model and unmatched scale.”

The latest talks come as CVS faces increasing pressure from investors such as Glenview Capital, which is said to be calling for changes within the company to help improve its operations after reducing its 2024 earnings outlook for the third consecutive quarter in August.

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

“While we believe management’s adjusted EPS growth target for 2025 is being met, we believe uncertainty regarding performance in 2024, as well as the outcome of CVS’s Medicare Advantage offerings for 2025, creates an unclear outlook for 2025 and beyond,” TD Cowen analysts. he wrote in an Aug. 11 note.

COSTS INCREASING, SHARE PRICES DOWN

CVS recently announced the departure of Aetna chief Brian Kane after its Medicare business, which serves Americans age 65 and older, underperformed due to rising health care costs and initiated a cost-cutting plan with a billion dollars. Aetna currently generates about a third of CVS’s total revenue.

To be sure, CVS isn’t the only health insurer facing higher medical costs. UnitedHealth Group (NYSE: ) reported rising costs earlier this year, and Humana (NYSE: ) in its most recent quarterly results suggested costs will remain high for the year.

CVS is led by healthcare industry veteran Karen Lynch, who previously ran the Aetna unit, and is temporarily overseeing the business with CFO Tom Cowhey.

The company’s shares have lost nearly a quarter of their value so far this year, underperforming , which has risen nearly 21% over the same period. It currently trades 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 about nine times for Cigna (NYSE: ).

“While we recognize that health insurance and PBM operations are currently facing challenges, we agree with management, as they pointed out at last year’s investor day, that the long-term weak link at CVS will likely be its namesake retail pharmacy stores Julie said. Utterback, analyst at Morningstar. “So unless there is a solution, such as substantially expanding healthcare services in those stores in the near future, a strategic shift may be necessary.”

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