Just after two years of launching its clinical trials services business, CVS recently announced its plan to exit the business by December 31, 2024. Originally launched to scale core capabilities in clinical trial delivery, precision patient recruitment, and real-world evidence generation and studies, adoption of decentralized clinical trials was necessary to broaden trial access to reach a larger number and potentially a more diverse pool of patients. Yet, CVS struggled with recruitment and enrollment diversity, which is a challenge among many retailers across the clinical trials industry.
There have been no confirmed reports on whether the clinical trials business’ financial performance faltered, though increasing investments in other high-growth businesses within the company offset the challenges faced in the clinical trials arena bolstering overall strong revenue growth in Q1 2023. “First quarter revenues of $85.3 billion increased by 11% year-over-year reflecting strong growth across each of our businesses”, said Shawn M. Guertin, chief financial officer & executive vice president of CVS Health Corp in a recent earnings call.
Among their five strategic imperatives, CVS’ commitment to growing its foundational businesses as well as reimagining omnichannel health experience is evident through the company’s recent large-scale M&A integrations of Signify Health and Oak Street Health and deployment of the company’s retail optimization strategy to reduce store density in the company’s efforts to enhance shareholder value. Another notable feat for the healthcare company is the addition of two new consumer segments: the Health Services segment (HSS) and the Pharmacy and Consumer Wellness segment (PCW) to simplify the company’s access to multi-payer capabilities which will create better alignment in the way they serve clients for enhanced consumer experiences as well as create an integrated omni-channel retail experience across all of its retail platforms to improve the pharmacy experience, respectively.
With long-term strategic imperatives at play, pivoting from the clinical trials business to focus on enhancing its current core capabilities to achieve scale is the way to go in order to uphold strategic alignment with corporate strategy.
CVS will phase its approach to exiting the clinical trials business by the end of 2024. With two M&A integrations completed this year and a retail optimization strategy underway, this new focus will help unlock key benefits to sustain the company’s overall financial performance and operational scale over the coming years.
Large Scale M&A Integrations
Mergers and acquisitions provide the benefits of increasing a company’s market share by expanding reach across customer segments, entering a new business where there may be barriers to entry, expanding current product/service offerings, and even acquiring innovative expertise, untapped talent, and/or resources, all leading to enhanced revenue potential.
In line with these key benefits, CVS’ acquisitions of Signify Health and Oak Street Health will “significantly advance [its] value-based strategy by adding primary care, home-based care and provider enablement capabilities to [its] platform. They also bring cutting-edge technology and talent that will accelerate innovation in areas such as automation, analytics and technology-enabled data-driven product development”, said Karen S. Lynch, president, chief executive officer & director of CVS Health Corp.
CVS will structure Oak Street Health as a payor-agnostic business within the company and acquire all of the outstanding shares of Oak Street Health’s common stock, while Signify Health, a market leader in the value-based healthcare payment industry, will bring a pipeline of opportunities which include updating their in-home evaluations to continue to accurately document conditions and diseases while adapting to CMS risk model changes, according to 10-K filings and company statements.
In a study published by Bain and Company, strategic healthcare deals declined by more than 30% and the average deal size fell by around 15% in 2022. However, pharma M&A activity is expected to rebound in 2023 as players with strong financial positions will leverage M&A as a means to foster innovation and solidify a robust growth strategy. While linking M&A strategy to overarching corporate strategy can result in stronger long-term yields, companies will still need to err on the side of caution when executing deals amid economic uncertainty. A couple pitfalls can include excessive expenses from the merger or acquisition that can negatively impact P&L as a result of not carefully weighing out the financial tradeoffs of pursuing the deal and prolonged timeline to integration which can impede efforts to scale existing business structures within a company.
For CVS particularly, the company is updating its 2023 guidance to include the net impact of its recent M&A activities. The headwind of approximately $0.35 resulting from the impacts of the Signify and Oak Street acquisitions and their associated financing, partially offset by underlying strength across the enterprise, resulted in a net headwind of $0.20, bringing their full year 2023 adjusted EPS guidance range to $8.50 to $8.70.
Retail Optimization Strategy
In addition to capabilities-focused M&A targets, CVS has also pursued a retail optimization strategy which was first announced in late 2021 to create new store formats to boost consumer engagement.
“We continued to successfully execute on our retail footprint optimization strategy, closing more than 100 locations year-to-date, while exceeding our retention goals for colleagues and scripts. We remain on track to close 300 stores in 2023 and a cumulative total of 900 stores by 2024”, said CEO Karen S. Lynch on the earnings call.
According to a 2023 Future of Retail report, 81% of retailers are planning to expand the number of digital channels they sell on in the next 12 months.
Benefits of optimizing retail footprint include an improved customer experience through omnichannel platforms to boost convenience, growth in profits with less capital to manage which would otherwise tie up cash, and increased operational efficiency of the company.
In 2021, CVS reported over 35 million unique digital customers with plans to drive a “digital-first, technology-forward approach that will expand the company’s reach and engagement—leading to customer satisfaction and lower costs”. Additionally, CEO Karen S. Lynch said that digital sales for the company is on the rise and engagement levels remain strong as digital customers are spending 2.4 times more than their non-digitally engaged customer base.
Therefore, though CVS’ clinical trials business will be winding down by the of the year, strategic moves such as capabilities-focused M&A and optimizing retail footprint will help to contribute to sustainable growth for the health corporation.
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