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What went wrong at CVS? Departing CEO Karen Lynch’s reign started brilliantly, then unraveled fast
Karen Lynch, a superstar CEO championing the biggest of big ideas, is out.
As chief of corner drug store and health insurance colossus CVS, Lynch headed the largest Fortune 500 enterprise, measured by sales, of any female CEO, and for years reigned as the most powerful woman in American business. In her first two years after being chosen for the top job in late 2020, Lynch seemed on the road to glory. By late 2022, she’d lifted CVS’s share price from $70 to roughly $110. Investors were buying her daring new strategy: Making CVS a one-stop shop for and basic care, right in their own neighborhoods, augmented by hands-on, data-driven management from their in-house insurer that reminded folks to refill prescriptions and get their annual physical.
Lynch pledged to “revolutionize healthcare as we know it” by repurposing thousands of CVS’s more than 9,000 stores into either fully-dedicated providers of such services as diabetic retinopathy and cholesterol screening, and mental health counseling, or hybrid retail and PC centers called HealthHUBs. CVS would then store tons of data on the patients’ condition at its Aetna insurance arm, whose costs would fall because seniors were getting preventive care that curbed heart disease and other chronic conditions that account for the bulk of our health care spending. Rival insurers would also reward CVS with part of the savings they achieved from the spread of primary care from far-away doctors’ offices requiring long waits, to the CVS just around the block, where you could also pick up your pills and buy shampoo and candy bars.
It was an intriguing vision that targeted our hugely expensive, largely consumer-unfriendly healthcare system. But Lynch couldn’t fully deliver on the paradigm that’s already starting to upend the current regime, and where CVS will continue playing a pivotal role going forward––one that will likely determine whether it rebounds from its current tailspin.
At press time, CVS hadn’t responded to a Fortune email requesting comment.
CVS underperforms already low expectations
On October 18, CVS disclosed that its heretofore weak financial performance was even worse the low expectations that already pushed big investors, including activist Glenview Capital, to demand changes in the C-suite. The board pre-announced that earnings for Q3 would prove far lower than both the company’s forecast, and Wall Street’s predictions. CVS posited EPS at $1.05 to $1.10, well below the FactSet consensus of $1.69. Accounting for most of the shortfall: Extremely tight margins in the health benefits business at Aetna, and especially in its giant Medicare Advantage franchise. CVS disclosed that its medal cost ratio of premiums to expenses had soared from an estimated 91% to over 95%. “That represents some combination of providing benefits that are too rich and underpricing premiums,” says Michael Ha of Robert W. Baird.
The same press release stated that Lynch “stepped down from her position in agreement with the company’s board of directors,” and will be replaced by David Joyner, a CVS veteran who’s been heading Caremark, the pharmacy benefits business.
Where Lynch’s transformation went awry
A trifecta of problems, some that started before she took the top job, ended a reign that appeared to start brilliantly, then unraveled fast. The first was CVS’s errors in vastly overpaying for acquisitions, a practice that piled on amounts of capital so huge that only magical performance could provide shareholders with decent returns going forward. In the years following its successful acquisition of Caremark in 2007, CVS was thriving. By late 2017, its shares had jumped around three-fold to $75. Then, it unveiled its acquisition of Aetna, where Lynch had risen to the position of heir apparent based on her skill in building the Medicare Advantage side.
CVS paid a gigantic $68 billion, or a 73% premium for Aetna. The day of the announcement, the two companies boasted a combined market cap of $128 billion. Proof that CVS hasn’t come close to generating the extra profits needed to cover that Brobdingnagian price: Its valuation now stands at just $76 billion, only slightly higher than what it paid for Aetna. The Aetna lesson didn’t deter Lynch and the board. In 2023, CVS made another hugely expensive deal, purchasing Oak Street Health, owner of over 200 centers in 25 states providing care for the elderly, this time laying out $10.5 billion, 30% or $2 billion more than the target’s cap prior to clinching the purchase. CVS made still another big bet by acquiring Signify, a health care analytics provider, for $8 billion. The Oak Street and Signify buys signaled that CVS was making desperate moves, adding big pieces to bolster the complex construct that Lynch conceived, but that wasn’t performing.
CVS became a revolving door at the top, and the vision proved overly complex
Lynch also kept changing her group of lieutenants at an alarming rate. It isn’t clear if she kept choosing the wrong people for the wrong roles, or was unable to get the talent she recruited to do their best work. From the spring of 2023 through this month, no fewer than seven C-suite stalwarts, all of whom she’d hired after officially taking charge in February of 2021, departed. The exodus encompassed the head of Aetna, who left after less than a year, the CFO (whose statement cited health reasons), the chiefs of HR, communications, healthcare delivery, and the retail stores. Two other longstanding CVS execs exited as well, the general counsel and chief marketing officer.
The third and final rub: The lofty, intricate blueprint proved beyond Lynch’s capacity to implement. It was her predecessor, Larry Merlo, who launched the initial phase via the purchase of Aetna, the first time ever that a huge insurer combined with a pharmacy chain. Lynch extended the framework through her plan for bringing primary care to America’s doorstep. Though the idea was a big one, CVS was getting a late start on the retail component, since Walgreens, Concentra and sundry others, including Oak Street, were invading what promised to become a gigantic market. Besides, the culture formed from running drugstores clashed with the mindset required to manage a major insurer, making it difficult to mate Aetna’s data troves with the folks CVS attempted to lure to its stores for primary care. The sudden drop in profitability for Aetna’s Medicare Advantage arm further undermined the ambition plan to meld the two businesses.
In the last couple of years, CVS has made scant mention of the original HeathHUBs concept. The focus now appears to be building out the well established Oak Street network. And according to Ha of Baird, it’s an excellent strategy. “That initiative will drive their growth for the next decade,” he says. “Oak Street-style, value-based care is still the future for CVS.”
The Pharmacy Division, the Health Services Division she set up, and the retail are doing well. Aetna’s margins collapsed as the Federal Government reduced their payments to Medicare Advantage. United and Cigna are both suffering too. That was unforeseen but it happened just as Aetna increased its Medicare rolls by 300,000 seniors. That was either unlucky or an unforced error. This extremely personable, charismatic leader deserves great credit for developing and superbly articulating a vision. It may even turn out that Lynch just needed more time. But that was a luxury that was, at least for CVS, out of stock.
This story was originally featured on Fortune.com
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Nasdaq, S&P 500 sink as tech leads losses ahead of Tesla earnings
Sales of existing homes fell in September as house hunters remained on the fence about buying a home despite mortgage rates easing during the month.
Existing home sales slipped 1.0% from August’s tally to a seasonally adjusted annual rate of 3.84 million, the National Association of Realtors said Wednesday. That marked the lowest rate since October 2010. Economists polled by Bloomberg expected a pace of 3.88 million in September.
On a yearly basis, sales of previously owned homes were 3.5% lower in September. The median home price rose 3.0% from last September to $404,500, marking the 15th consecutive month of annual price increases.
“Home sales have been essentially stuck at around a 4 million-unit pace for the past 12 months,” NAR chief economist Lawrence Yun said in a press release.
There have been significant challenges that have weighed on sales activity, including a lack of inventory, escalating prices, and elevated mortgage rates. Last month, however, those factors turned around.
The Federal Reserve cut its benchmark rate by half a percentage point in September. While the central bank doesn’t set mortgage rates, its actions influence their direction of movement.
Mortgage rates hit the lowest level since February 2023 ahead of the Fed decision to ease, while listing inventory picked up.
But overall, that hasn’t been enough to entice buyers.
“Some consumers are hesitating about moving forward with a major expenditure like purchasing a home before the upcoming election,” Yun said.
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Tesla stock jumps on Q3 earnings beat
Tesla (TSLA) reported mixed third quarter results after the bell on Wednesday, but the stock jumped in after-hours trading as investors cheered the earnings beat, higher gross margins, and news that Tesla’s cheaper EV is on track for production next year.
For the quarter, Tesla reported revenue of $25.18 billion vs. $25.4 billion per Bloomberg consensus, higher than the $25.05 billion it reported in Q2 and also topping the $23.40 billion Tesla reported a year ago. Tesla posted adjusted EPS of $0.72 vs $0.60 expected, on adjusted net income of $2.5 billion and free cash flow of $2.9 billion.
The closely watched gross margin figure came in at 19.8%, much higher than the 16.8% expected.
Tesla shares were up nearly 8% in after hours trade.
“We delivered strong results in Q3 with growth in vehicle deliveries both sequentially and year-on-year, resulting in record third-quarter volumes,” the company said in its earnings deck. “Preparations remain underway for our offering of new vehicles — including more affordable models — which we will begin launching in the first half of 2025.”
Earlier this month, Tesla (TSLA) announced third quarter deliveries that slightly missed expectations, sending the stock lower.
Tesla said it delivered 462,890 vehicles in Q3, up 6.4% quarter over quarter, to mark the first quarter of delivery growth this year. The numbers also came in ahead of the 435,059 EVs the company delivered in the year-ago period. But Wall Street had expected Tesla to deliver closer to 463,897, according to Bloomberg.
“Refreshed Model 3 ramp continued successfully in Q3 with higher total production and lower cost of goods sold quarter-over-quarter. Cybertruck production increased sequentially and achieved a positive gross margin for the first time,” Tesla said in its report.
Tesla said it expects vehicle deliveries to achieve “slight growth” in 2024.
Ahead of Tesla’s Q3 disclosure, shares were down approximately 11% since Tesla revealed its robotaxi, dubbed the Cybercab, at its showy “We, Robot” event from the Warner Bros. studio lot in Burbank, Calif., on Oct. 10.
The debut and release of a cheaper EV is what many analysts and industry watchers believe will spur the next leg higher of EV sales, as even CEO Elon Musk has said before. During its Q2 report, Tesla and Musk said the company remains on track for the production of new vehicles, likely including a cheaper EV, in the first half of next year.
Investors and analysts were left wanting more details from Tesla’s “We, Robot” event on the Cybercab itself and detailed testing plans, along with questions about the development of Tesla’s sub-$30,000 EV, dubbed the Model 2.
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Transak hit by data breach, 92K users exposed
Transak disclosed a data breach affecting over 92,000 users after a phishing attack compromised an employee’s laptop.
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The Dow plummets more than 600 points and is on track for its worst day in more than a month
The Dow Jones Industrial Average and other major indexes suffered a steep decline Wednesday afternoon as the yield on the benchmark 10-year U.S. Treasury note continued its upward climb, reaching 4.23%—a level not seen since July.
In the afternoon, the Dow dropped 631 points, or 1.4%, heading for its worst day in over a month. Meanwhile, the tech-heavy Nasdaq and the S&P 500 declined by 2.2% and 1.4%, respectively. However, there was some relief for investors as oil prices eased, with West Texas Intermediate (WTI) futures trading around $70.65 per barrel.
The Federal Reserve’s Beige Book, released in the afternoon, reported that economic activity remained largely unchanged across the 12 Federal Reserve Districts, with the Southeast significantly impacted by a harsh storm season.
On Wednesday, all eyes are on Tesla (TSLA) as the company prepares to release its latest earnings report. Analysts expect earnings per share to be 60 cents, down from 66 cents a year ago but an improvement from 52 cents in the previous quarter, according to FactSet estimates. Revenue is projected to hit $25.4 billion, compared to $23.3 billion in the third quarter of 2023 and $25.5 billion in the preceding quarter.
Apart from Tesla, investors are closely monitoring earnings reports from other major corporations, including AT&T (T), Boeing (BA), and Coca-Cola (KO).
McDonald’s stock plunges over 5%
McDonald’s (MCD) shares took a sharp hit, falling over 5% after the Centers for Disease Control and Prevention (CDC) linked the chain’s Quarter Pounder burgers to an E. coli outbreak. The outbreak has led to 10 hospitalizations and one death, driving a significant decline in McDonald’s stock during the afternoon trading session.
As of now, 49 cases have been reported across 10 states between Sept. 27 and Oct. 11, with a majority of illnesses occurring in Colorado, Nebraska, Utah, and Wyoming. The CDC noted that most of those affected had eaten a Quarter Pounder. Investigators are working swiftly to identify the contaminated ingredient.
Spirit Airlines stock soars 30%
After a failed attempt at merging with JetBlue (JBLU-0.80%), ultra-low-cost carrier Spirit Airlines (SAVE+28.01%) is reportedly turning back to a familiar partner. The Wall Street Journal (NWSA-0.34%), citing people familiar with the matter, reports that Spirit and Frontier Airlines (ULCC+3.05%) are in early talks over a potential merger. The news sent Spirit’s stock soaring nearly 30% on Wednesday.
–Francisco Velasquez and Rocio Fabbro contributed to the article
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Zanzibar’s new blockchain sandbox aims to drive tech startup growth
The semi-autonomous region of Tanzania is taking advantage of a sandbox regulatory framework adopted in July.
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Price analysis 10/23: BTC, ETH, BNB, SOL, XRP, DOGE, TON, ADA, AVAX, SHIB
Bitcoin’s correction ignited selling in altcoins, which are slipping below critical support levels.
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