CVS is reportedly weighing a breakup. Some analysts have mixed feelings.

By Bill Peters

'While there's no guarantee it will happen, any company split would acknowledge that CVS can't be the integrated healthcare powerhouse it once thought,' analyst says

Over nearly two decades, CVS Health Corp. has spent billions of dollars on acquisitions - for pharmacy benefits manager Caremark Rx in 2007, health-insurance giant Aetna in 2018, and Oak Street Health and Signify Health last year - in an effort to make itself into a one-stop health destination. The drugstore chain's most recent annual report says it expects "to continue to pursue acquisitions" and other deals.

But after recent stumbles and a slump in its stock price, the Wall Street Journal and Reuters reported this week that the chain (CVS) was weighing strategic options, including a possible breakup of the company that would split its retail stores from its insurance business.

Afterward, some analysts expressed reservations about such a move, were it to happen - a prospect that isn't guaranteed.

"We have mixed views about a potential breakup of the CVS Health assets," BofA analysts said in a research note on Tuesday. "In a normal environment, it could be reasonable to assume that the health plan Aetna could obtain a higher earnings multiple as a standalone business."

"However," they continued, "Aetna's underperformance year-to-date is the main driver of CVS' weak share price, and it is unclear how much investors would reward that business as a standalone entity, especially on current year or next year's earnings."

The analysts added: "Put another way, we think CVS Health could generate substantial shareholder value by improving margins within Aetna over the next few years."

The Journal said on Monday that no decision related to the strategic review was likely to be made in the immediate future and that it was possible the review could lead to no changes.

A CVS representative, in a statement on Monday, declined to comment on the Journal's report. But the company said it was "continually exploring ways to create shareholder value."

The BofA analysts also said a possible breakup would lead to questions about where its pharmacy benefit manager business would fit. Pharmacy benefit managers act as middleman negotiators who manage plans and play a role in determining who can get which prescriptions for how much.

"For the health plan, the PBM creates opportunities for cross selling, adding scale to both businesses," the analysts said. "For the retail pharmacy, the integrated PBM can funnel patients into the pharmacy, supporting prescription growth and foot traffic."

They continued: "Given CVS Caremark's longstanding integration with CVS Pharmacy, those two businesses appear more synergistic. We also note that customer attrition could also be a risk if assets are split."

The health-services company has been closing stores and laying off staff, as drugstores deal with thinner profits and weaker sales and as demand for COVID-19 vaccines has waned. Rajiv Leventhal, an analyst at Emarketer, also pointed to thinner reimbursements for prescriptions.

The stores have also faced steeper competition from the likes of Amazon.com Inc. (AMZN). Health insurers, meanwhile, have been dealing with rising costs.

Shares of CVS were down 3.1% on Tuesday. The stock is down 22.9% so far this year and down 12% over the past 12 months.

A day earlier, the stock got a bump following a report that CVS had met with hedge-fund investor Glenview Capital Management to discuss ways to recharge its financial performance.

"CVS Health is facing intense investor pressure," Leventhal said in emailed commentary. "The strategic review will likely reveal that the company's recent acquisitions and investments in the healthcare space are not paying off as promised."

He said that Aetna and Caremark would likely stay together, since the nation's other big pharmacy benefit managers had aligned themselves with large health insurers. He added that CVS and its investors are likely also monitoring the state of rival Walgreens Boots Alliance Inc. (WBA), whose own healthcare business is losing billions.

"While there's no guarantee it will happen, any company split would acknowledge that CVS can't be the integrated healthcare powerhouse it once thought," Leventhal said.

-Bill Peters

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10-01-24 1434ET

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