A proposed CVS breakup could shift focus back to its retail pharmacy business
CVS Health’s board of directors is reportedly considering splitting up the company to separate its retail and insurance businesses amid pressure from investors — potentially a major shift in strategy for what has become a health care conglomerate.
Over the past couple of decades, the company has grown beyond its pharmacy roots through major deals, most notably its acquisition of insurer Aetna in 2018 for $78 billion. It bought Minute Clinic in 2006, pharmacy benefits manager Caremark in 2007, infusion therapy service Coram in 2014 and long-term-care pharmacy Omnicare in 2015. Last year, it paid $10.6 billion to buy the Oak Street Health primary care clinics and $8 billion to buy in-home provider Signify Health.
CVS has more than 9,000 retail pharmacy locations, including those inside other stores such as Target. According to the company’s full-year guidance, it expects sales to hit between $369 billion and $372 billion, and about a third of that would be from the pharmacies.
Analysts say the reported spinoff could help CVS better focus on its retail business and better compete with companies like Target, Walmart, dollar stores and online businesses that may have taken market share from the pharmacies.
News of the potential breakup came after hedge fund Glenview Capital Management, which owns about 1% of the pharmacy’s shares, met with the company to discuss ways to improve operations, per the Wall Street Journal. The company also announced Tuesday plans to cut about 2,900 jobs — primarily corporate roles and less than 1% of its workforce — to save costs. In August, CVS said that higher medical costs had squeezed its insurance business to the point where it would have to cut $2 billion in expenses over several years. That is after the company laid off 5,000 workers last year and announced in 2021 it would close about 900 stores between 2022 and 2024.
“Our industry faces continued disruption, regulatory pressures and evolving consumer needs and expectations,” a CVS spokesperson told multiple outlets regarding the layoffs.
While the entire industry faces challenges, CVS is doing better than others. Walgreens’ parent company Walgreens Boots Alliance reported U.S. retail pharmacy revenue of $110 billion in 2023, up 1% from 2022, while CVS’s pharmacy revenue reached $116 billion in 2023, up 7.5%. Rite Aid filed for Chapter 11 bankruptcy in October 2023 and emerged in September after closing hundreds of pharmacies and eliminating about $2 billion in debt.
Neil Saunders, managing director and retail analyst at GlobalData Retail, said if the company’s insurance and health care businesses are split into a separate company, that could enable the retail pharmacy business to run separately. But it’s so far unclear how the businesses will split up.
“CVS hasn’t seen itself as a retailer for a very long time,” Saunders said. “The reality is that retail is still a critical part of its business; not only does it generate a lot of revenue and profit, but it is also a traffic driver for other parts of the business, like health care services and pharmacy. And the problem is: if you let retail unravel too much it starts to affect other parts of your business, so I think they need to focus on it.”
Other retailers have tried to disrupt the health care business with mixed results. In 2022, Amazon shut down its telehealth business Amazon Care because it “wasn’t a sustainable, long-term solution for its enterprise customers” and bought One Medical for $3.9 billion, which it continues to operate. Amazon earlier this year also announced it would offer its drug subscription program RxPass to Prime members on Medicare. Earlier this year, Walmart shut down its health care centers and telehealth operations due to a lack of profitability.
As difficult and competitive as retail is, Saunders said these companies found health care to be even more difficult to disrupt. “If they had focused more on retail — yes, it’s difficult, but it’s much easier to have an impact there than it is in health care,” Saunders said, noting that health care has the complexities of insurance companies, care providers and their vested interests.
Analysts at Deutsche Bank said in a note Tuesday that they do not believe much value will be unlocked with a breakup, especially if the retail company doesn’t include Signify and Oak Street. They said those two health businesses would at least give some perception of growth to the retail pharmacies, which they say face risks due to drug-pricing and PBM (pharmacy benefit managers) reform as well as lower reimbursement rates for prescription drugs.
“In short, we believe CVS’ more-aggressive evaluation of strategic alternatives is overdue, but the company’s value has diminished because of poor execution that we are not sure how much value can be salvaged in the short to medium term,” the analysts wrote.
Walgreens’ parent company has also contemplated making major strategic moves to cut costs. In late 2023, the company had been considering selling UK pharmacy chain Boots for as much as $8.8 billion and, in January, was exploring the sale of specialty pharmacy business Shields Health Solutions for more than $4 billion, according to Bloomberg. But both plans have reportedly been shelved.
Brad Jashinsky, a retail analyst for Gartner, said the biggest questions for pharmacies moving forward will include how the November election and health care affordability legislation on the state and federal levels play out, as well as what kind of moves Amazon makes in the space. So far, he said, people just haven’t changed their behavior in the way CVS hoped when building the more diversified company.
“The consumers have just not shifted to going to CVS for more and more of their health services,” Jashinsky said.