CVS Shifts Focus to Integration Over Acquisition

Sept. 18, 2023
CEO Karen Lynch says the company’s leaders are “starting to see overall execution” from their work on Signify Health and Oak Street Health

After the big splashes must come the big synergies.

The leaders of CVS Health Corp. last week told analysts and investors that, on the heels of their purchases this spring of home health venture Signify Health and clinic operator Oak Street Health for a combined $17 billion, the idea of more big acquisitions has moved to the backburner in favor of the blocking and tackling needed to get their new holdings to gel with each other and other entities under CVS’ umbrella.

“More M&A in the near term is certainly not the priority,” CFO Shawn Guertin told attendees of last week’s Morgan Stanley 21st Annual Global Healthcare Conference 2023. “Certainly, over time, there are other capabilities that would make sense to bring into that vision […] but we’d have a bias towards those being accretive.

“M&A plays a longer-term role but not in the same way it has in the last two years.”

CVS’ health services group, which also includes its large pharmacy benefit management business and the MinuteClinic network of more than 1,000 primary-care clinics, rang up second-quarter adjusted operating profits of $1.9 billion on $46.2 billion in revenue. For calendar 2023, those numbers are expected to be about $7.2 billion and $182 billion, respectively, and weaving “anchor assets” Oak Street and Signify into the group will be key to growing them in 2024 and beyond.

Oak Street, which was founded in 2012 and focuses on Medicare plan members, has in its network about 180 clinics and more than 180,000 at-risk lives. Signify has a national network of more than 10,000 clinicians as well as analytics and technology platforms and during the second quarter completed 673,000 in-home health evaluations.

So far, so good on the integration front, President and CEO Karen Lynch told the Morgan Stanley confab.

“There are two things that matter when you think about unlocking the value of those two businesses. One is membership and the second is lowering overall acquisition cost,” Lynch said. “We’ve been really trying to drive Oak Street membership and Signify membership and using the whole entire enterprise to do that […] The milestones that we put in place, we’re starting to see overall execution.”

Guertin said the basic premise behind CVS’ push into health services—rival Walgreens Boots Alliance has made similar moves, as has Amazon with its $3.9 billion purchase of One Medical—is to raise the company’s long-term growth rate. Integrating its Aetna insurance arm, which includes a million-lives Affordable Care Act exchange business Guertin expects will begin generating profits next year, with its PBM and the health services portfolio via risk-based operations will be the way to do that, he added.

All that means future M&A will be of a modest size.

“Never say never, but it’s unlikely, right, that those would be of the size and scale potentially of what we’ve just done,” Guertin said. “We really needed kind of that anchor asset, that anchor capability to really power this value-based engine.”

Shares of CVS (Ticker: CVS) ended last week at $70.87, up about 7 percent from the previous Friday thanks in part to an upgrade from analysts at Wolfe Research. Over the past six months, however, they have slipped slightly, trimming the company’s market capitalization to about $91 billion.