Latest / Bloomberg Intelligence / CVS Plans to Break Up $117 Billion Healthcare Conglomerate

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CVS Plans to Break Up $117 Billion Healthcare Conglomerate · Bloomberg Intelligence

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  Speaker 1: Bloomberg Audio Studios. Podcasts.
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  Speaker 2: Radio.
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  Speaker 3: News.
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  Speaker 4: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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  Speaker 5: As promised, we want to get to this big news
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  Speaker 5: out of CVS, breaking up its gigantic business, spinning off
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  Speaker 5: the retail pharmacy business into a new company while keeping
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  Speaker 5: its Aetna Insurance and Caremark Prescription Benefits Division as CVS Health.
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  Speaker 5: John Tazi is our Bloomberg Healthcare reporter and joins us now.
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  Speaker 5: Is this an experiment that just kind of went wrong?
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  Speaker 1: Well, I don't think we know yet.
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  Speaker 2: CVS is unlike most of its peers in that it
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  Speaker 2: does have a big retail pharmacy chain.
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  Speaker 1: That's what the company is most known for.
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  Speaker 2: But, you know, it also has, as you said, Aetna,
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  Speaker 2: a giant insurance company that they bought about seven or
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  Speaker 2: eight years ago, and the pharmacy benefits manager, so running
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  Speaker 2: prescription drug plans. Most of its peers, which are now
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  Speaker 2: companies like UnitedHealth, Cigna, Elevan's Health, don't have that retail
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  Speaker 2: pharmacy footprint. So they are a little unique in that respect.
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  Speaker 2: And retail pharmacies have struggled in recent years, as we've
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  Speaker 2: seen with Rite Aid and Walgreens.
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  Speaker 6: When this deal was announced, I remember saying, I don't
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  Speaker 6: get it.
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  Speaker 1: I just don't get it.
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  Speaker 6: What was the industrial logic for putting these companies together?
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  Speaker 2: You know, so the current kind of CVS enterprise is
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  Speaker 2: assembled over a number of deals over, you know, the
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  Speaker 2: last 20 years from the retail stores, adding the pharmacy
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  Speaker 2: benefits manager.
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  Speaker 1: You can see some synergies there, right?
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  Speaker 2: Where you have, you're dealing with people's prescription drug plans
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  Speaker 2: on one end, and then you're dispensing their medications on
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  Speaker 2: the other. Adding Aetna more recently kind of brings them
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  Speaker 2: into all, you know, kind of across the supply chain,
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  Speaker 2: as it were, of healthcare, I think the question for
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  Speaker 2: the company now is, does it make sense to have
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  Speaker 2: a big retail footprint in an era when retail is challenged?
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  Speaker 2: Their answer seems to be that that asset is better
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  Speaker 2: off on their own.
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  Speaker 5: And it goes back to the point, Paul, that you
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  Speaker 5: were saying, which is the investment bankers come out of
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  Speaker 5: this ahead because they helped put together the deal many
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  Speaker 5: years ago.
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  Speaker 1: I mean, different parts of the deal.
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  Speaker 5: And now they're going to play a big role in
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  Speaker 5: taking it apart.
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  Speaker 6: I've done that trade several times in my career.
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  Speaker 1: Get paid on both sides.
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  Speaker 7: It's fun. Get paid on both sides.
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  Speaker 5: So what does this mean for rivals, for rival health
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  Speaker 5: insurers and for rival pharmacy chains?
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  Speaker 2: Yeah, I think it's a little hard to tell from
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  Speaker 2: this point. One point that executives did make today from
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  Speaker 2: CVS was that the pharmacies as an independent entity, it'd
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  Speaker 2: be called CVS Pharmacy, could have new partnerships with some
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  Speaker 2: competitors to the CVS on the insurance side. So you
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  Speaker 2: can imagine when they are sort of separated from the
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  Speaker 2: parent company, you know, maybe that opens some space to
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  Speaker 2: have a different kind of relationship with, you know, other insurers. But,
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  Speaker 2: you know, they already have contracts with other insurers and PBMs.
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  Speaker 2: So the logic isn't intuitive off the bat of what
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  Speaker 2: this would, you know, what they would gain from spinning
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  Speaker 2: this as an independent company.
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  Speaker 6: Stock's down 12% on the news today. What's the market
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  Speaker 6: not liking, not understanding? What do you think's going on
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  Speaker 6: out there?
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  Speaker 1: Yeah, I mean, so this did come as a surprise.
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  Speaker 1: This was not signaled.
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  Speaker 2: In fact, just 11 months ago at their investor day,
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  Speaker 2: a big theme was how having.
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  Speaker 1: kind of all their assets.
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  Speaker 2: Integrated under common ownership was an advantage. And they talked
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  Speaker 2: about how they could kind of integrate the consumer experience.
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  Speaker 2: They have a new app that they have promoted that
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  Speaker 2: is supposed to bring all these sort of different touch
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  Speaker 2: points with patients or customers together.
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  Speaker 1: So it is sort of a left turn.
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  Speaker 2: I think there are questions also about just the economics.
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  Speaker 2: So if you're a shareholder in CVS today, The plan
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  Speaker 2: is that you would get shares in both the legacy
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  Speaker 2: company and the spun-off pharmacy business. And then you have
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  Speaker 2: sort of a low-growth, low-margin pharmacy entity with its own overhead.
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  Speaker 2: There were questions on the call about whether the synergies
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  Speaker 2: that you get from having a combined company, like what
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  Speaker 2: are the costs for replicating a bunch of overhead?
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  Speaker 7: Right.
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  Speaker 5: I'm glad you bring up the investor day last year
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  Speaker 5: because it feels a little bit abrupt and perhaps not
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  Speaker 5: necessarily well thought out and reactive, if anything.
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  Speaker 2: Yeah, so it's not clear to me exactly what the
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  Speaker 2: impetus is. Management said that they have, so the current CEO,
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  Speaker 2: David Joyner, came in about.
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  Speaker 1: Two years ago. The business was under distress.
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  Speaker 2: There were big losses in Aetna that he helped recover margins.
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  Speaker 2: That's an ongoing story on the insurance side. They did
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  Speaker 2: also improve the performance of the retail pharmacy chain. And
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  Speaker 2: they say that they're operating from a position of strength
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  Speaker 2: that the asset is in good shape to be kind
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  Speaker 2: of spun out on its own. But I think if
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  Speaker 2: you look at the share reaction this morning, clearly the
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  Speaker 2: market doesn't believe that.
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  Speaker 1: Stay with us.
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  Speaker 6: More from Bloomberg Intelligence coming up after this.
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  Speaker 1: Live on YouTube.
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  Speaker 6: You know, I always say in the next life I
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  Speaker 6: want to come back as a healthcare banker. I think
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  Speaker 6: I want to be a bond salesman selling tech bonds
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  Speaker 6: because they're just coming out every single day. Mandeep Singh
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  Speaker 6: is here. He covers all of the technology stuff for
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  Speaker 6: Bloomberg Intelligence. He leads one of the best tech teams,
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  Speaker 6: research teams on global Wall Street here. Let's just start
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  Speaker 6: with Meta. 9 billion euro here, 10 billion U.S. More
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  Speaker 6: of the same? I mean, how long are these companies
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  Speaker 6: going to keep building all this capacity and financing it
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  Speaker 6: and however they finance those stocks.
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  Speaker 7: Well, things have definitely changed after last night, so.
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  Speaker 6: All right, let's start there. 30,000 foot level, the world
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  Speaker 6: of technology, did the world of technology change with the election?
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  Speaker 3: Well, I don't think the pace of AI will change
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  Speaker 3: in a big way in terms of what companies are
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  Speaker 3: looking to do. At the same time, the build-out of
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  Speaker 3: data centers could certainly be affected by what happened last night.
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  Speaker 3: Given the surprise in Texas and, you know, all of
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  Speaker 3: these companies are setting up their data centers in Texas.
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  Speaker 3: So whether timelines will shift for existing data centers, probably
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  Speaker 3: not in a big way for but for anything new.
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  Speaker 3: I would expect, you know, if there are moratoriums, then
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  Speaker 3: it could even impact your CapEx numbers for 2027. I'm
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  Speaker 3: not even going to 2028. 2027 CapEx could be revised
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  Speaker 3: lower by 5% to 7%. Really?
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  Speaker 2: Yes.
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  Speaker 6: See, to me, a data center, how is that different
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  Speaker 6: than a, you know, Walmart database? warehouse in the middle
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  Speaker 6: of Cherry Hill, New Jersey.
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  Speaker 3: I mean, because with a data center, you need power.
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  Speaker 3: You need a lot more in terms of, you know,
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  Speaker 3: the utilities around it, which impacts the households. So I
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  Speaker 3: think that's where this is not just limited to the
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  Speaker 3: warehouse and what it does in terms of the, you know,
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  Speaker 3: the occupations and everything around it. But it has far
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  Speaker 3: reaching impact in terms of the communities.
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  Speaker 5: So is a revision down of 5% to 10% for
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  Speaker 5: 2027 CapEx a good thing, a bad thing?
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  Speaker 1: How will investors react to that?
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  Speaker 3: I mean, you can see the hyperscalers are all up 5%
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  Speaker 3: to 7% today.
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  Speaker 7: Why?
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  Speaker 3: Because everyone thinks the free cash flow for those companies
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  Speaker 3: may not.
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  Speaker 7: Be as negative.
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  Speaker 1: The financials look better.
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  Speaker 3: The financials look better for hyperscalers who are the investors
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  Speaker 3: in that CapEx build-out. Now they may have to do 5%
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  Speaker 3: less in 2027. There will still be big numbers, but
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  Speaker 3: it will be 5% less compared to where consensus numbers are.
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  Speaker 5: So investors like the restraint that this puts on the hyperscalers.
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  Speaker 3: It's just like, where do you build the data centers now?
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  Speaker 3: So permitting gets harder.
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  Speaker 5: In Jersey.
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  Speaker 3: And I would say it gets more spread out, which
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  Speaker 3: may be a good thing for the overall cycle because
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  Speaker 3: you're not going to overbuild and then there will be
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  Speaker 3: a certain cliff.
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  Speaker 7: You're going to spread things.
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  Speaker 3: Out in a way where maybe CapEx growth would be 30%
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  Speaker 3: next year and 25% the year after. And so it
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  Speaker 3: will be more spread out as opposed to growing 50%
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  Speaker 3: next year and then getting to a cliff.
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  Speaker 6: All right. Let's talk some earnings here.
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  Speaker 7: Uber.
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  Speaker 3: Uber.
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  Speaker 6: What's happening there?
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  Speaker 3: Well, I think they have a real problem right now
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  Speaker 3: with the AV side of the equation and how they
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  Speaker 3: don't have their own technology, but they have to ramp
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  Speaker 3: up their investments.
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  Speaker 7: So R & D for Uber grew 48% in the quarter.
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  Speaker 3: Whereas the historical growth was more like mid to high teens.
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  Speaker 7: So 48% R & D growth.
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  Speaker 2: Why?
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  Speaker 7: Because they're ramping up their AI investments.
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  Speaker 3: And on top of that, everyone complains about their pricing.
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  Speaker 7: That's never a good position to.
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  Speaker 3: Be in when everyone feels they're overcharging. So I think
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  Speaker 3: the take rates probably would get compressed and investments would
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  Speaker 3: go up. And the third factor is probably what's going
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  Speaker 3: on with the consolidation between DoorDash and Instacart.
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  Speaker 7: So that will be more competition.
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  Speaker 5: I mean, it's a pretty strong reaction here, and the
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  Speaker 5: share is up 8.5%. Is that just because the broader
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  Speaker 5: market is up? I mean, you cite a couple of
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  Speaker 5: things that sound kind of concerning.
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  Speaker 7: Yeah, yeah.
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  Speaker 3: I mean, look, on the whole, I think Uber as
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  Speaker 3: a source of gig economy employment, it's good. And I
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  Speaker 3: think that is what the market is focused on today.
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  Speaker 3: But overall, from an expense perspective, I do think their
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  Speaker 3: expenses are going higher. and they have to reinvest a
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  Speaker 3: lot more in the company.
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  Speaker 6: Here's another earnings headline I think we've read before for
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  Speaker 6: AMD this time. AMD forecast exceeds estimates after AI chip
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  Speaker 6: demand soars. I guess it's just the same old, same old.
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  Speaker 6: They can't build enough chips.
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  Speaker 3: I mean, what a contrast between Intel and AMD. Intel
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  Speaker 3: had such a horrible quarter where everyone had higher expectations
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  Speaker 3: and they blamed the memory pricing on their, you know,
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  Speaker 3: really bad PC outlook. AMD, on the other hand, similar
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  Speaker 3: exposures did so much better and guided so much better.
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  Speaker 7: So that's why you see that contrast.
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  Speaker 5: Is that just a matter of execution that Lisa Su
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  Speaker 5: deserves credit for managing through this better than Liputan?
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  Speaker 3: Well, certainly AMD has better exposures on the GPU side,
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  Speaker 3: the way they are working with the hyperscalers, including Anthropic
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  Speaker 3: and Meta. And so their data center exposure is far
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  Speaker 3: better than Intel's.
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  Speaker 7: And so you could attribute to execution.
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  Speaker 6: I think Matthew from Brooklyn, who I know at AMD,
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  Speaker 6: he probably had a big hand in it. What do
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  Speaker 6: we do with AMD here?
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  Speaker 7: Stocks up 125%.
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  Speaker 6: I mean, are these chip stocks going to keep running?
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  Speaker 3: I'm a little concerned about memory right now, given.
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  Speaker 7: What's going on with the CapEx outlook.
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  Speaker 3: And everyone thought, you know, higher memory prices is why,
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  Speaker 3: you know, CapEx numbers were going up. So if CapEx
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  Speaker 3: is more spread out, that could have a bearing on,
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  Speaker 3: you know, memory and those type of segments.
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