• by Sarah Mahoney  @mahoney_sarah, October 1, 2024

CVS Health, which spent $70 billion to buy Aetna in 2017, is exploring a do-over. Reuters reports that the struggling healthcare giant is under increasing pressure from hedge funds and other investors to take radical steps to improve performance, and is meeting with advisors to explore restructuring.

One plan, Reuters says, is to break CVS into two publicly held companies, one for retail and one for insurance. It is not clear where the company’s pharmacy benefits manager unit, the component that manages drug sales for health plans, would live.

The reports have “the smell of desperation,” writes Deutsche Bank analyst George Hill, who notes that the advising bankers have been hired by the CVS’ corporate board, “making us question whether or not the process includes the management team.”

CVS, which has not commented on the report’s details, said Monday that it would lay off 2,900 corporate employees as part of an ongoing plan to cut $2 billion in expenses.

The layoff announcement came after Wall Street Journal reports that executives from Glenview Capital Management, which now owns about 1% of CVS stock, were meeting with CVS executives to press for larger changes.

“We believe CVS’ more-aggressive evaluation of strategic alternatives is overdue,” Hill writes. “But the company's value has diminished because of poor execution so that we are not sure how much value can be salvaged in the short to medium term.”

"While we realize the medical insurance and PBM operations are facing problems currently, we agree with management, as highlighted last year at its investor day, that the long-term weak link at CVS will likely be its namesake retail pharmacy stores," Julie Utterback, an analyst at Morningstar, tells Reuters. "So, unless there is a fix, such as expanding healthcare services in those stores substantially in the near future, a strategic change there may be necessary."

Last month, CVS reported second-quarter revenues of $91.2 billion, a 2% gain from the prior year. Operating income fell to $3.05 billion from $3.23 billion in the second quarter of last year. But it slashed its full-year profit outlook again and unveiled a $2 billion cost-cutting initiative.

At the same time, the Woonsocket, Rhode Island-based company removed Brian Kane as chief executive officer of Aetna. CEO Karen Lynch, who held the role of president at Aetna before taking the reins for the entire company, will assume those Aetna responsibilities.

CVS certainly isn’t the only drugstore suffering. RiteAid emerged from bankruptcy earlier this month. Walgreens has been looking to slim down its portfolio, too. It is reducing its stake in VillageMD, after posting a $6 billion loss on the acquisition. And while Walgreens has scrapped its plans to spin Boots, the U.K. retailer, off as a separate company, it also said it would close 25% of its stores.