CVS Health plans to split in two. Here's what is driving the massive healthcare breakup.

By Jaimy Lee

The healthcare giant surprised analysts with the decision to separate its business. Its stock closed 12.5% lower.

CVS Health plans to split up into two companies. (Photo by Mario Tama/Getty Images)

CVS Health plans to split its sprawling healthcare business, unwinding one of the most important healthcare deals of the 2010s.

The healthcare giant announced Wednesday that it will separate into two publicly traded companies by 2028: CVS Health will house Aetna, the health-insurance arm, and the pharmacy benefits business; and CVS Pharmacy will operate the retail stores and pharmacies.

CVS Health's stock (CVS) ended the day down 12.5%.

During a call with analysts on Wednesday morning, CVS executives sought to defend the decision.

"We are not doing anything out of a distressed decision," David Joyner, current CEO and soon-to-be chief executive of CVS Health, told investors, according to an AlphaSense transcript. "We are doing it because we have healthy balance sheets with appropriate capital allocation opportunities and momentum in each one of the businesses that we are operating."

Analysts were surprised by the initial report in the Financial Times that such a transaction was coming, though they attributed the decision to legislative worries for its pharmacy benefits business. Also referred to as PBMs, these businesses are facing scrutiny in Washington over their perceived role in contributing to rising healthcare costs.

"While the rationale behind the potential breakup remains unclear, we suspect the decision is largely driven by mounting legislative and legal pressures surrounding vertically integrated healthcare companies, particularly PBMs, and to unlock the value of the health insurance business," Mizuho Securities analyst Ann Hynes wrote in a note on Tuesday.

In 2017, CVS said it would buy Aetna in a massive $69 billion merger. At the time, healthcare companies were on edge over reports earlier that year that Amazon (AMZN) was planning to enter the industry. Amazon's official move into healthcare, which came a year later with the $1 billion acquisition of an online-pharmacy startup called PillPack, was viewed as a threat to legacy companies, and several took action to defend against tech's move into healthcare.

Companies like CVS began to focus on making the healthcare experience more consumer-friendly. It built out its urgent-care and primary-care business, spending about $10 billion to buy Oak Street Health, which provides primary care to older adults.

"The market continues to evolve and change," Joyner said, "and as a company, we need to continue to evolve with it."

The company's third-quarter results were better than expected. It reported revenue of $108.4 billion in the third quarter, up about 5% from $102.9 billion in the same three months of last year and outpacing the FactSet estimate of $104.8 billion.

The medical-benefit ratio - an important metric showing how much health insurers are paying for medical care - came in at 91.3%, beating the FactSet consensus of 92.3%. The lower the ratio, the better it is for the company.

Adjusted earnings per share were $2.09, against a FactSet estimate of $1.65.

But same-store sales continued to struggle. CVS pointed to a 0.6% drop - a sharp contrast to being up 14.3% in the third quarter of last year. The FactSet consensus was that same-store sales would be down 1.4%.

CVS shares are flat so far this year, while the State Street Health Care Select Sector SPDR Exchange Traded Fund XLV is up 21.7%.

-Jaimy Lee

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11-04-26 1606ET