Final week, CVS Well being CEO Karen Lynch was pushed out of a task that had made her probably the most highly effective lady in American enterprise for years, atop an organization with 2023 income of $358 billion.
The corporate’s poor monetary efficiency final quarter and weak revenue forecast proved to be the final straw for the CVS board. It had bored with her lack of ability to efficiently deliver collectively the completely different enterprise elements of an organization that, via a slew of pricy M&A offers, had change into a Frankenstein.
Three days earlier, CVS’s archrival Walgreens Boots Alliance introduced it could shut 1,200 U.S. shops in a tricky atmosphere for prescription success and weak retail gross sales. Lots of these soon-to-be-closed places had been a part of the two,186 Ceremony Support shops Walgreens had purchased in 2018 in a $5.2 billion comfort prize deal after failing to purchase its smaller rival outright. (At their peaks, CVS and Walgreens had retailer fleets of almost 10,000 places. CVS has additionally been closing tons of of shops.)
Like its two a lot bigger rivals, Ceremony Support additionally has some M&A egg on its face. A yr in the past, Ceremony Support filed for Chapter 11 chapter safety choking underneath debt, some $3 billion of it initially stemming from a 2006 acquisition of the Eckerd and Brooks chains. On the time, the massive chains had been attempting to make land grabs to emerge as nationwide leaders in a sector lengthy dominated by independents and small regional chains however hefty curiosity bills stymied Ceremony Support’s funding in shops and skill to construct out its well being providers.
All this M&A-fueled empire constructing has finally failed, and induced the Drugstore Huge Three to divert consideration away from their core enterprise: working shops. The underinvestment in drugstores has led them to change into unappealing (that’s made worse now, with half of what you need from the entrance of the shop behind lock and key) and dated, and with many Individuals opting to get their medicine by way of mail or the drive-thru. And that in flip finally broken all three corporations’ efforts to make use of their hundreds of shops as hubs to create broader well being care enterprise. Retail gross sales in any respect three chains have been weak for years. “Both CVS and Walgreens have been guilty of chasing healthcare dreams at the expense of retail. That shortsightedness is now hitting them hard,” says GlobalData managing director Neil Saunders. In a remark to Fortune, CVS mentioned its shops had been thriving.
Let’s take CVS. Its transformation from the Chain Worth Retailer drugstore chain based in 1963 to the sixth-largest firm on the Fortune 500 started in earnest in 2007, when it purchased pharmacy advantages supervisor Caremark for $21 billion. Whereas that deal proved helpful to CVS, notably by serving to to construct a bigger mail-order pharmacy and making it a giant participant within the booming pharmacy profit supervisor (PBM) market, later offers had been too expensive and made CVS too unwieldy to handle successfully. In 2018, CVS paid $68 billion for Aetna (the place Lynch had been for years) at a 73% premium. It adopted that up with a $10.5 billion deal final yr for Oak Avenue Well being, proprietor of over 200 facilities in 25 states offering look after the aged, and it additionally acquired Signify Well being, a well being care analytics supplier, for $8 billion. (To be honest, offers just like the one to purchase Goal’s pharmacy enterprise in 2015 have labored out properly.)
Though Lynch had come from Aetna, buying it was not the truth is her concept. The plan was hatched by the CEO earlier than her, Larry Merlo, who handpicked her as his successor. However she purchased into the technique full-on. Her concept was to make CVS a one-stop store for pharmacy providers and primary care, because of hands-on, data-driven administration from its in-house insurer that reminded of us to refill prescriptions and get their annual bodily.
Walgreens, in distinction, doubled down an excessive amount of on bodily drugstores for years. In 2014, Walgreens finalized shopping for British druggist Boots for $22 billion in a bid to create the primary worldwide drugstore operator. The architect of that deal, Stefano Pessina, later turned CEO after which pushed in 2015 to purchase Ceremony Support for $17 billion. Two years later, after intense regulatory scrutiny, Pessina scaled down the Ceremony Support deal and Walgreens purchased 2,000 of its 5,000 shops, a lot of which overlapped with present Walgreens and had been fairly shabby.
Walgreens’ more moderen M&A veered away from conventional drugstores however was nonetheless not a hit. In 2021, it took a majority stake in primary-care clinic chain VillageMD for some $5 billion, solely to put in writing down a lot of that earlier this yr after Walgreens determined to cut back the enterprise.
And now Walgreens is closing lots of the Ceremony Support places it purchased, that means that deal was akin to setting an excellent chunk of that $5.2 billion on hearth. (Walgreens has additionally did not dump Boots, which had as soon as been thriving however has struggled extra just lately.) The results of Walgreens’ M&A exercise within the final decade is that shares are down 85% from their highs in 2015 when Pessina turned CEO.
And now leaders at these chains have to determine what to make of the haphazard property they’ve been left with. At CVS, activist shareholders fed up with the weak inventory efficiency have an concept: Satirically, they’re pushing for the corporate to think about breaking itself up, undoing a lot of the M&A that took up the final 18 years.
