CVS's Strategic Review: Weighing Options for Months

CVS Health, a leading healthcare services company, has been engaged in a strategic review of its business for some time, according to people familiar with the matter. This review, which involves the company's board and advisors, comes as CVS contends with potential activist pressure and a severely depressed stock price. The company's management, including CEO Karen Lynch, has been exploring various options to create shareholder value and drive performance.

One of the options being considered is a potential break-up of the company, separating its retail and insurance units. This move would effectively unwind CVS's landmark $70 billion takeover of healthcare insurer Aetna in 2017. The pharmacy benefits manager (PBM) unit, which manages drug benefits for health plans, would also need to be housed within either the retail or insurance unit if a separation were to occur.

The potential break-up of CVS's retail and insurance units could have significant implications for shareholder value. By separating the two businesses, CVS could unlock synergies and cost savings that have been elusive under the integrated model. For instance, each unit could focus on its core competencies and optimize resources more effectively. However, a break-up could also present challenges, such as integration issues and loss of brand recognition.

CVS's recent cost-cutting measures and layoffs may influence the strategic review process. The company announced plans to cut about 2,900 jobs, representing less than 1% of its workforce, in an effort to slash costs. These reductions are primarily corporate roles and will not impact front-line jobs in stores, pharmacies, and distribution centers. The layoffs add to the 5,000 or so layoffs disclosed last year and the closure of around 900 stores between 2022 and 2024. These cost-cutting measures could help CVS improve its financial performance and create shareholder value, but they may also impact the company's ability to innovate and adapt to changing healthcare trends and consumer behaviors.

CVS's underperforming Medicare business has also been a factor in the company's strategic decisions. The Medicare business, which generates roughly a third of CVS's overall revenue, has underperformed due to rising medical services costs. This has led to the exit of Aetna head Brian Kane and the initiation of a $1 billion cost-cutting plan. The underperformance of the Medicare business may influence CVS's strategic review, as the company seeks to address the rising costs and improve the performance of this critical segment.

In conclusion, CVS Health's management and board have been weighing options for months as part of a strategic review of the company's business. A potential break-up of the retail and insurance units could have significant implications for shareholder value, but it also presents challenges and risks. CVS's recent cost-cutting measures and the underperformance of its Medicare business are factors that may influence the strategic review process. As CVS continues to explore its options, investors will be watching closely to see how the company's strategic decisions impact its financial performance and competitive position in the retail pharmacy and insurance markets.