In the current business landscape, CVS Health is feeling the heat. Amidst declining sales and frustrated shareholders, CVS is currently contemplating a potential breakup. However, this decision carries significant uncertainty and risks.
The Pharmacy powerhouse has been on a journey of transformation as it attempts to redefine the sphere of health and wellness. CVS is a leading health care company with diversified business lines beyond just being America’s largest pharmacy chain. Other businesses under its umbrella include Aetna, the health insurance company, CVS Caremark, the prescription benefits manager, and MinuteClinic, the company’s retail medical clinic.
Recently, the firm has attracted attention with investors like Engine Capital Management putting pressure on CVS to separate its pharmacy business from the insurance unit, Aetna. They argue that such a move could enhance shareholders value by unlocking hidden potential within both business units.
However, CVS’s decision to consider such a split is fraught with perils and uncertainties. For starters, a significant part of CVS’s appeal to customers and a unique selling point has been its ability to serve as a one-stop-shop for everything health-related. A breakup may erode this unique customer offering.
The integration of Aetna into its operations was a significant move by CVS in its quest to provide more health services and decrease reliance on retail sales. This merger with Aetna was designed to help transform the company’s stores into health hubs. CVS had planned dedicated sections within its stores – for yoga classes and dietician consultations. This distinctive model combining retail pharmacy with health insurance services was expected to set the company apart from competitors, and a split could jeopardize these plans.
Moreover, the separation could cause economic inefficiencies. Operating as a single unit allows CVS to exploit economies of scale and scope and helps manage and minimize insurance risks. Breaking up this integration could lead to higher operational costs, which could, in turn, lower profit margins.
From a financial standpoint, the breakup seems less attractive. A report by Bloomberg Intelligence analyst, Jonathan Palmer, explains that the move might not necessarily enhance shareholder value. The merged entity of CVS and Aetna reported $8.6 billion in adjusted EBITDA for the year 2020, suggesting formidable financial health. Splintering this profitable union could lead to a potential drop in revenues.
There are also administrative costs and hurdles to consider. For instance, regulatory issues and legal clearances can make business breakups a complicated process. Such separations can often lead to major disruptions in business operations.
Trustees of mutual funds and pension plans who own CVS shares also seem to be wrestling with the idea of a split. They find themselves caught between their fiduciary responsibility and the pressure to deliver returns.
While a breakup could potentially stimulate improved focus and streamlined operations within CVS’s disparate divisions, the significant associated risks cannot be ignored. These include potential disruptions to CVS’s transformation plans, increased operational costs, regulatory and administrative hurdles, potential revenue loss, and skepticism from mutual and pension fund costodians.
In the face of these mounting pressures, CVS’s ability to weigh the benefits against the risks will determine the course the pharmacy giant takes. The coming years will inevitably be pivotal for CVS Health, as it navigates these challenges amidst an evolving health and wellness landscape.