CVS Promises More Health Care, Less Candy Under New CEO
(Bloomberg) -- CVS Health Corp. is much more than a 58-year-old drugstore chain, and Chief Executive Officer Karen Lynch wants to make sure you know it.
“We’re a broad health-solutions company,” Lynch, a health-insurance industry veteran who took the reins at CVS in February, said in an interview. “We are moving toward being a much more consumer-centric health-services, health-solutions company meeting the needs of consumers where they want to be met.”
Her emphasis speaks to the future of both CVS and health care at large. As more of the industry moves online, Wall Street is questioning the chain model where companies operate thousands of drugstores, some just blocks from one another. Pharmacies are becoming less profitable as insurers pay less for dispensing medications. And fewer people are turning to their local store for convenience items they can buy with a click.
During the pandemic, the drugstores have been something of a double-edged sword. Consumers shunned them as Covid began spreading, then swarmed them for tests and shots. On Wednesday, when CVS raised its full-year guidance as it beat estimates for second-quarter earnings, management’s warning that the vaccination business would slow sent the stock tumbling. The company also backed off expectations for double-digit growth in 2022, a projection given in 2019, amid uncertainty around the virus.
Shares of CVS fell 1.3% Thursday at 9:45 a.m. in New York.
CVS is also competing against startups with smartphone apps that deliver medications directly to patients’ doors, further threatening brick-and-mortar stores. Most ominous is Amazon.com Inc. -- with its millions of users and offers such as six-month supplies of some generic drugs for only $6 -- making a bigger splash in the space.
Any hint that the e-commerce goliath is making headway can send CVS and other drugstore shares tumbling. Nonethelesss, Lynch’s goal is to increase CVS’s stock price to $100 a share, a jump of almost $20, and Wall Street is watching.
“I like what they’re doing, trying to diversify as a way to eventually get out of that business where anything related to pharmaceuticals drives a lot of volatility in the stock,” said Jefferies analyst Brian Tanquilut.
From a single store in Lowell, Massachusetts in 1963, CVS has grown into the nation’s largest drugstore chain. The Woonsocket, Rhode Island-based company expanded its reach in 2007 with its acquisition of Caremark, which manages pharmacy benefits and processes prescription claims. Three years ago, CVS’s reach widened even further with the $68 billion purchase of health-insurance giant Aetna.
Acquiring Aetna would make CVS a truly diversified company, serving consumers’ health needs in communities across the country, company executives said at the time of the purchase. Lynch, an Aetna veteran herself who came to CVS via the deal, now must define what exactly that looks like.
The vision is that a single company supplies patients’ health insurance, prescriptions, medical supplies and a certain degree of direct care. In fact, CVS already has an Aetna insurance plan that includes visits to CVS MinuteClinics without a copay, discounts on CVS-branded health products and free prescription delivery.
The numbers tell the story. Retail accounted for less than a third of CVS’s $269 billion in 2020 revenue. Pharmacy benefits accounted for half and health insurance made up about a quarter.
Lynch and CFO Shawn Guertin, a fellow Aetna transplant, are also changing investors’ perception of the company, said JPMorgan analyst Lisa Gill.
“They both have really strong reputations in managed care and health-care services,” she said. “I think that will help start to shape how people think about CVS.”
And then there are those drugstores. The pandemic already altered the spaces a bit, as they became venues for Covid testing and vaccinations, and CVS is adding some of its own touches.
Most visible are the Health Hubs: remodeled stores that stock wellness products such as essential oils and diffusers and at-home thyroid and diabetes tests. Beyond the earache and sinus infection treatments that drugstores are known for, the hubs offer medical services for people with chronic conditions like high cholesterol, diabetes and depression.
Drugstores clearly have a place under Lynch, Gill said, but it will likely be a more limited one in the CVS of the future.
“We’re going to think of them a lot more as a health-care centered entity that offers some health and beauty things versus a drugstore that also owns some other health-care assets,” she said.
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