CVS Health plans to split its insurance business from about 9,000 pharmacies

CVS Health (NYSE: CVS) said on Wednesday, November 4, that it intends to separate into two independent, publicly traded companies, a health-insurance and services business and a pharmacy business, with completion expected in the first half of 2028, according to its announcement filed with the SEC.

Insurance and benefits on one side, 9,000 pharmacies on the other

The healthcare solutions company would comprise Aetna, CVS Caremark, CVS Specialty, Oak Street Health and Signify Health, and keep the CVS Health name for now, the company said. The pharmacy company, named CVS Pharmacy, would comprise approximately 9,000 CVS pharmacies, mail pharmacy, MinuteClinic (including virtual care) and the Health100 technology services business.

David Joyner, currently Chairman and CEO of CVS Health, will be the Chairman and CEO of the healthcare solutions company. Prem Shah, currently Group President of CVS Health, will be the CEO of CVS Pharmacy. Other leaders and board members are to be named later.

What the company has and has not said about the terms

The separation is intended to be tax-free to CVS Health and its shareholders for US federal income tax purposes, the company said. It gave no revenue, debt or dividend figures for either company. It said both companies are expected to have a solid investment grade rating at the time of separation.

The plan is subject to customary conditions, including, among others, final approval by the CVS Health Board of Directors. The company's release adds that a Form 10 registration statement with the SEC must become effective and that it has no assurance the separation will happen on the stated terms or timeline. Until then, CVS Health said it will keep operating as it has been.

The same-day quarter shows two businesses growing in opposite directions

In a separate release on November 4, CVS reported third-quarter results in which total revenues increased to $108.4 billion, up 5.4% from a year earlier. Adjusted earnings per share were $2.09, up from $1.60 in the prior year. The company raised its full-year adjusted EPS guidance to at least $8.20 from a range of $7.90 to $8.10, and its cash flow from operations guidance to at least $15.5 billion from at least $11.5 billion.

The segments split the way the separation draws the line. Health Services revenue rose 9.5% to about $54.0 billion, Health Care Benefits rose 2.4% to about $36.9 billion, and Pharmacy & Consumer Wellness fell 2.0% to about $35.5 billion, according to the company's segment tables. Segment boundaries do not match the two new companies exactly, because the pharmacy company would also include MinuteClinic and Health100.

Investors and analysts reacted to a decision they did not expect

Shares of CVS fell roughly 10% on Wednesday after the announcement, CNBC reported. The same article quotes Michael Cherny of Leerink Partners saying that the news "feels like a complete shock". Cherny also pointed to "relentless state legislative scrutiny over the company's level of vertical integration" as a possible motive; CVS did not give that as a reason in its announcement, which cites focus, an independent capital structure and a simpler structure.

The combination being undone dates to the $78 billion acquisition of its insurer, Aetna, according to CNBC. Joyner said in the announcement that "we plan to create two focused companies to improve consumer engagement", as CNBC quoted him.

A split that moves the questions rather than answering them

We think the announcement is a decision about structure, not yet about economics. The company has published no figures on how debt, cash flow or the dividend would be divided, and a 2028 completion date leaves the Form 10 and the capital structures as the documents that will show where each company's money goes. For a business we judge by capital allocation, those are the numbers that matter.

The opportunity is that a pharmacy company, whose revenue fell 2.0% in the quarter, and a benefits-and-services company, whose segments grew 2.4% and 9.5%, can each be run and financed on its own terms. The threat is the cost and distraction of untangling shared contracts and technology for more than a year while both businesses keep competing. We would change our view if the Form 10 shows that either company starts with weaker margins or heavier debt than the combined group reports now.

The view in this final section is FinanceInTime's editorial opinion, for information only. It is not investment, tax, legal or other advice, and it does not take your circumstances into account. Forecasts are uncertain and past results do not guarantee future ones.