Biotech
Tuesday, October 1st, 2024 5:53 pm EDT
Key Points
- Strategic Review and Management Changes: CVS Health’s board is conducting a strategic review amid pressure from activists and a declining stock price, considering options such as breaking up its insurance and retail businesses. CEO Karen Lynch recently took direct control of the insurance unit, following significant leadership changes due to rising medical costs.
- Financial Challenges and Cost-Cutting Measures: CVS has announced plans to cut $2 billion in expenses over several years, including a reduction of less than 1% of its workforce, totaling around 2,900 jobs. The company also projected losses of up to $1 billion in 2024 due to declining Medicare Advantage star ratings, which impact its revenue from government bonus payments.
- Mixed Performance in Business Units: While CVS’s pharmacy and consumer wellness division experienced sales growth from increased prescription volume, its retail segment faced challenges from falling reimbursement rates, decreased in-store sales, and pressures from inflation and competition. Same-store sales at retail locations dropped by roughly 4%, prompting CVS to focus on private-label products to attract budget-conscious consumers.
CVS Health is currently undergoing a strategic review of its business in light of declining stock prices and potential activist pressure, according to sources familiar with the situation. Although this review has been in progress for some time, it remains uncertain what actions may be taken, with the possibility of breaking up the company’s insurance and retail segments being considered. The company’s management, including CEO Karen Lynch, recently met with major shareholder Glenview Capital to discuss CVS’s disappointing performance and strategies for revitalizing its stock value. In a statement, CVS emphasized its commitment to enhancing shareholder value through improved performance and integrated healthcare services.
Despite the challenges, CVS shares experienced a slight increase of about 1% in premarket trading following the news of the review. The company has been grappling with rising medical costs within its insurance segment, which has seen leadership changes, including Lynch’s direct oversight of the insurance unit, previously led by Brian Kane. In August, CVS announced a plan to cut $2 billion in expenses over the coming years, which will involve reducing its workforce by approximately 2,900 employees, or less than 1% of its total staff.
CVS owns Aetna, a significant player in the health insurance market that provides various plans, including those for Medicare Advantage, Medicaid, and dental and vision coverage. The rising medical costs, particularly for Medicare Advantage patients who are returning for delayed procedures post-COVID, have become a pressing concern for CVS and other insurers like UnitedHealth Group and Humana. This trend has led to increased scrutiny from Wall Street regarding the sustainability of these plans amid soaring costs.
The company’s recent outlook for 2024 was lowered, partly due to a decline in Medicare Advantage star ratings, which are essential for patients comparing the quality of plans and affect the bonus payments insurers receive from Medicare. CVS has warned of potential losses of up to $1 billion in 2024 resulting from these lower ratings. Unlike some competitors, CVS has additional business units—such as its retail pharmacy and health services—that may mitigate the impact of rising medical costs.
While the pharmacy and consumer wellness segment reported year-over-year sales growth, attributed to increased prescription volume, it also faced challenges due to declining reimbursement rates for prescriptions and decreased sales of non-pharmaceutical items. The retail side of CVS has been under pressure from inflation, reduced consumer spending, theft, and competition from e-commerce giants like Amazon and traditional grocery stores. This has resulted in a 4% drop in same-store sales in the front of the store compared to the previous year, indicating a broader softening of consumer demand. In response, CVS is focusing on private-label products to attract cost-conscious shoppers shifting from national brands to combat inflation.
For the full original article on CNBC, please click here: https://www.cnbc.com/2024/09/30/cvs-is-working-with-advisors-on-strategic-review-sources-say.html
