CVS bets on break-up to dodge political backlash against healthcare giants
Bipartisan campaign targeting consolidated ownership of pharmacies, insurers and prescription drug managers weighs on sector
Almost two decades to the day after CVS won the bidding for pharmacy benefit manager Caremark, the US healthcare giant said it would jettison its pharmacy business as mounting bipartisan pressure threatens its business model.
It said on Wednesday it would spin off about 9,000 pharmacies into a new public company, unwinding years of expansion that brought drugstores, health insurance and prescription management under one roof.
The move comes as public and political outrage over runaway healthcare costs and industry consolidation spelled the end for a strategy that turned the US pharmacy chain from a single drugstore in Lowell, Massachusetts, into one of the nation’s biggest healthcare conglomerates.
Shares in CVS fell 12.5 per cent on Wednesday as investors fretted over the potential distraction of an 18-month break-up and how the debt load would be shared between the two businesses.
Chief executive David Joyner defended the new strategy, telling analysts: “We are not doing anything out of a distressed decision.” Prior to Wednesday’s pullback, CVS’s shares had bounced back from a decade low in December 2024.
The model served investors well before the Covid-19 pandemic but it struggled in recent years as rising healthcare costs crimped margins and Amazon and Walmart began to compete for pharmacy business, both in prescriptions and household items such as detergent and toilet paper that aided profitability.
CVS’s troubles even drew the attention of activist hedge fund Glenview Capital, whose founder Larry Robbins served on the healthcare group’s board for two years until August.
Pressure from the Federal Trade Commission over drug pricing as well as Washington and US state capitals over combined ownership of pharmacies and PBMs presented an impasse for CVS and its rivals.
“PBMs are the bogeyman,” said Chris Meekins, a healthcare policy analyst at Raymond James. Companies have been relying on the courts to stop the laws, “but that is always a dangerous game” if they start to lose.
Democrat Ron Wyden, who in January will take over a US Senate panel overseeing the healthcare industry, said on Wednesday he would scrutinise conglomerates and “[end] the corporate chokehold on our nation’s healthcare system”.
Reforming the PBM system has been one of the few areas where there is cross-party agreement in Washington. Earlier this year, Republican senator Josh Hawley and Democrat Elizabeth Warren introduced a bill to ban large healthcare companies from owning pharmacies.
“All these huge companies gobbling up local pharmacies should be broken up,” Hawley said in a statement on Wednesday about the CVS spin-off.
At the state level, legislation to force CVS and others to break up their PBM businesses has already passed in Arkansas and Tennessee, though companies have challenged the laws in court. The CVS spin-off would appear to comply with these state regulations.
Speaking to CNBC, Joyner acknowledged how legislative pressure had weighed on the break-up decision. “What you see in the regulatory environment is clearly one of the things that we need to make sure we’re navigating, and we are positioning the company to be able to thrive regardless of how these companies are being expected to operate,” he said.
“CVS realised the insurance and PBM side of the company was more valuable,” prompting it to pursue the split, Meekins added.
In an interview with the FT last year, Arkansas Republican governor Sarah Huckabee Sanders said her state’s law was necessary because people sometimes struggled to get medicines from the big three pharmacy companies.
“When they get to own both sides of the negotiation, then the consumers are the ones who lose,” Sanders said. “PBMs have shown they care more about their bottom line and less about the people they are supposed to serve.”
CVS and other companies sued to stop the Arkansas law, which was halted by a federal district court judge last year. The litigation is ongoing. Groups have also sued to halt a similar law passed in Tennessee.
Investors said on Wednesday they were frustrated by the lack of details from CVS about the split. “The market might be just reacting negatively to the fact that this could be an 18-month overhang on the stock with lots of uncertainty leading up to the completion,” Daniel Barasa, a portfolio manager at Gabelli, said in an interview.
Other large healthcare groups were unlikely to follow CVS and break up their integrated businesses, he said. CVS was different because it has such a large retail pharmacy footprint.
“I don’t think this is a signal that you’ll see similar transactions from other big integrated players in the market,” said Barasa. “This is just [CVS] getting ahead of regulatory pressure.”