By Paul R. La Monica

CVS could wind up as the only pharmacy stock in the U.S. if Walgreens goes private. But the drugstore chain, worth about $66 billion, could also become much smaller in the not-so-distant future.

The company's board has been considering a breakup for a few months now. It's also possible the government could force its hand.

A bipartisan group of lawmakers plans to call for healthcare conglomerates like CVS to sell their pharmacy benefit manager $(PBM)$ businesses, which negotiate price rebates with pharmaceutical companies and often run their own mail-order pharmacies.

CVS owns the giant PBM Caremark. Insurers UnitedHealth and Cigna own Caremark rivals Optum and Express Scripts, respectively.

Concerns about high drug prices and the possibility for more regulation in Washington have weighed on shares of CVS, Walgreens, and insurers such as UnitedHealth, Humana, Cigna, and Anthem owner Elevance Health. CVS has plunged 34% in 2024. It was down 5% alone on Wednesday.

In mid-October, shortly after the CVS board put a breakup on the table, CEO Karen Lynch stepped down. Her successor is longtime CVS exec David Joyner, who most recently headed the chain's pharmacy services division.

Now, investors are also questioning whether CVS really benefits from having its finger in so many different pieces of the healthcare pie. Besides Caremark, the company owns insurer Aetna, primary-care clinic operator Oak Street Health, and in-home healthcare services provider Signify Health.

CVS pushed back at the notion it needs to sell assets or tear itself apart.

"We believe in the integrated value our businesses deliver," David Whitrap, vice president of external affairs, told Barron's in an email.

"They work together to build a world of health around every consumer -- connecting people to the care they need, putting medicine and wellness with reach, and driving greater affordability...," he wrote.

Whitrap added: "Any policies that would limit our ability to negotiate with drugmakers and pharmacies would ultimately increase the cost of medicine in the United States, and in many cases, serve as a handout to the pharmaceutical industry."

Still, some analysts argue that splitting up CVS up could lead to more value for shareholders.

Evercore ISI's Elizabeth Anderson suggested a three-pronged CVS -- retail operations, insurance, and the PBM business -- in a report that came out after the news of a possible breakup. The median sum of the parts value would be $73 a share, which is nearly 40% above the current price.

Anderson arrived at her valuation by comparing the enterprise value to Ebitda multiples for pure-play insurers and Walgreens to the three units at CVS. The ratio is calculated by dividing enterprise value by earnings before interest, taxes, depreciation and amortization (Ebitda).

Anderson wrote hat she wasn't surprised that CVS was "taking a hard look" at a breakup because there is some "trapped value" in the company. But she said it is more likely CVS stays together instead of splitting up.

BofA Securities analyst Allen Lutz agrees a breakup isn't in the cards. In early October, he wrote that Aetna's underperformance was the main reason for CVS stock's weak share price, "and it is unclear how much investors would reward that business as a standalone entity." The stock could get a boost, he pointed out, if CVS improved Aetna's margins over the next few years.

Still, Lutz came up with a $77 breakup target, using price-to-earnings ratios for Walgreens and the insurers to generate values for the three business lines of CVS.

The direction that CVS goes depends a lot on what the government does with its Medicare Advantage program, offered by private companies as an alternative to original Medicare.

Wall Street hopes the incoming Trump administration won't take such a hard line on regulation and payment rates as the Biden White House has. That would hurt the argument for a CVS breakup.

And many analysts still like the stock. Of 28 who cover CVS, 19 rate shares Buy and nine have a Hold recommendation. The consensus price target is $66.32 -- 20% above its current price.

Finally, the stock looks cheap. It's trading at just 8.5 times next year's earnings estimates, below its 5-year historical average.

CVS could very well be a bargain regardless of what the company -- or the government -- decides to do.

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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December 11, 2024 14:14 ET (19:14 GMT)

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