Joyner says $500 million lost-synergy estimate much closer to CVS models
When CVS Health said on Nov. 4 it would spin off its 9,000 drugstores, the announcement drew no celebration from either side of the debate. Critics of healthcare consolidation called the plan a political decoy that leaves the conflicts of vertical integration at the insurance conglomerate untouched. Investors raised a separate objection: taken apart, the pieces might be worth less than they are together. CVS lost some $15 billion in market value when the breakup was announced.
The plan arrived with almost no financial detail, according to David Wainer’s Heard on the Street column in The Wall Street Journal. CVS did not say how it would divide its $60 billion of debt, or how much it would cost the two businesses to operate separately. Wainer writes that skeptics read the announcement as a retreat under regulatory fire — at a moment when breakups have become increasingly popular on Wall Street, on the argument that they sharpen management’s focus and allow faster-growing businesses to command higher valuations.
Investors assumed the worst about the economics of the split. Some feared that the lost benefits of common ownership — lost synergies, in Wall Street parlance — could top $1 billion a year. At a Wolfe Research investor conference this week, CVS Chief Executive David Joyner said an analyst’s estimate of about $500 million a year was “much closer” to CVS’s own models. The comments helped lift the shares, though they are still trading slightly below where they stood before the Nov. 4 announcement. Whether existing contracts between the stores and pharmacy-benefit manager Caremark stay in place over the long term is another matter.
Wainer sets that financial question alongside the operating one: selling pills and sunscreen out of labor-intensive stores is a very different business from managing drug benefits at Caremark, insuring patients at Aetna or dispensing specialty drugs. Joyner said in an interview that regulation has steadily eroded the advantages of owning drugstores. Caremark’s benefit designs once drew members to CVS counters, but many states have moved to restrict such arrangements, and some have moved to ban common ownership of pharmacies and pharmacy-benefit managers, or PBMs, outright. Wainer argues that if the stores no longer give the rest of CVS a meaningful edge, splitting them up might leave investors better off — even if it does nothing to appease lawmakers. Wainer then asks why CVS would keep what he calls a capital-intensive, slow-growing political headache.
Specialty pharmacy is a different story. These pharmacies handle expensive drugs for complex conditions such as cancer and multiple sclerosis, often injectables that need special handling and can cost tens of thousands of dollars a year. Joyner says pairing CVS’s specialty pharmacies with the PBM still pays off, and that state lawmakers have mostly gone after PBMs that own retail pharmacies, not specialty ones.
There is also a simpler financial logic, in Wainer’s account: investors value store chains and managed care operators very differently, and once apart, each business can be judged — and run — on its own terms. CVS’s pitch is that a company focused on the faster growing parts of the healthcare system will receive a much higher multiple and lose the conglomerate discount. Skeptics doubt it. They value the store chain against Walgreens, the drugstore chain taken private last year at six to seven times enterprise value to earnings before interest, tax, depreciation and amortization. And they value the rest of CVS as another Cigna, which also owns an insurer, a PBM and a specialty pharmacy and trades at about 9 to 10 times expected earnings. At about 10 times next year’s expected earnings, CVS is already priced much like Cigna.
Wainer writes that the Cigna comparison may not be entirely fair. Cigna’s insurance arm mostly covers employer plans, while Aetna has the country’s third-largest Medicare Advantage business and the largest specialty pharmacy. Joyner argues that makes CVS Health more comparable to UnitedHealth, which trades at roughly 18 times expected earnings. Medicare Advantage has historically earned insurers a premium valuation, and it is driving CVS’s earnings recovery this year. Wainer’s case for a higher multiple therefore hinges on Aetna’s Medicare business continuing to improve, which he says is as much a political question as a financial one.
Wainer also argues that the drugstores probably deserve a bit better valuation than Walgreens. Retail pharmacy is a tough business, he notes, but CVS has more scale, and with rivals closing hundreds of stores there is less competition than there used to be. Profits are growing: adjusted operating income at the stores rose about 11% last quarter, helped by Rite Aid prescriptions and locations CVS bought last year.
On the politics, Wainer writes that the bigger problem for CVS, and for the rest of the healthcare conglomerates, is that healthcare costs aren’t going away as a political issue — and that CVS is keeping the businesses that critics find most troubling. Caremark will still be able to send patients to CVS’s own specialty pharmacies.
That is where the money is. As Joyner himself notes, the roughly 2% of patients taking specialty drugs account for about half of all drug spending. Critics argue that when a PBM decides which drugs qualify as specialty and then fills those prescriptions at its own pharmacy, it can mark them up. A bipartisan bill from Sens. Elizabeth Warren (D., Mass.) and Josh Hawley (R., Mo.) that would force PBM owners to sell their pharmacies, specialty ones included, is unlikely to advance soon. But the pressure isn’t going away, Wainer writes, and could some day mean a broader breakup.
Wainer’s conclusion is that spinning off the stores won’t get Washington off CVS’s back — but that it could still be the best move for shareholders.