headshot - CVS Health President and CEO Karen Lynch

CVS plans to sell Omnicare long-term care pharmacy business, saying it is ‘no longer a strategic asset’

CVS Health President and CEO Karen Lynch

Woonsocket, RI-based CVS Health plans to sell its long-term care pharmacy business, Cincinnati-based Omnicare, reporting a $2.5 billion loss related to it in the third quarter, the company announced Wednesday.

“We continue to evaluate our portfolio strategically and are making decisions around assets that don’t fit into our portfolio strategically. Omnicare is a good example of that,” President and CEO Karen Lynch said Wednesday morning on the company’s third-quarter earnings call.

“The Company determined that its LTC business was no longer a strategic asset and during the third quarter of 2022 committed to a plan to sell the LTC business,” CVS said in a filing with the Securities and Exchange Commission on Wednesday, made in conjunction with the call.

Omnicare serves senior living communities, skilled nursing facilities and Programs of All-Inclusive Care for the Elderly (PACE).

For accounting purposes, Omnicare “met the criteria for held-for-sale accounting and the net assets were accounted for as assets held for sale,” the company reported Wednesday. “The carrying value of the LTC business was determined to be greater than its fair value and a loss on assets held for sale was recorded during the third quarter of 2022.”

In the third quarter, according to CVS, the company recorded a $2.5 billion pretax loss on assets held for sale to write down the company’s long-term care business in the current year, which partially was offset by the absence of a $431 million goodwill impairment charge on the remaining goodwill of the Omnicare unit recorded in the prior year.

2015 acquisition

CVS acquired Omnicare in 2015 for $10.4 billion plus the assumption of $2.3 billion in Omnicare debt, according to published sources. At the time, then-CEO Larry Merlo said that the purchase gave the retail pharmacy giant “access into a new dispensing channel.”

Rumors of a possible Omnicare sale circulated in August 2020, when a CVS spokeswoman told McKnight’s Senior Living that it would be consolidating positions within the long-term care business. Some put the number of positions at stake at more than 700, although CVS did not confirm a specific amount.

“The healthcare industry is evolving as patients and clients change how they interact with service providers and as payer programs evolve,” Shelly Bendit, a senior communications consultant with CVS Health, said at the time. “We regularly evaluate all of our businesses to ensure that we are positioned to best serve our customers while running our operations as efficiently as possible.”

CVS had not publicly expressed an intention to leave the long-term care business at that point, but a few months earlier, in January 2020, Merlo had described the company’s experience with Omnicare as “disappointing.” In remarks during a JP Morgan Healthcare Conference session, he also noted that the skilled nursing sector was “challenged” and that people’s desire to convalesce at home was continuing to affect demand for long-term institutional pharmacy services.

“We continue to see the opportunity in the growth of assisted and independent living, and that’s where our focus remains,” he said at the time, according to a transcript.

On an August 2020 earnings call, CVS executives noted that the COVID-19 pandemic had “substantially affected” Omnicare and the company’s long-term care presence overall.

“As you look at the industry challenges, we’ve seen admissions down about 20% and some facilities continuing to not accept new patients but not be shut down per se,” CVS Health Vice President and Chief Financial Officer Eva Boratto said at the time .

Lynch joined CVS as its new CEO in February 2021. Early this year, effective July 1, Ahmed Hassan was appointed president of Omnicare, having joined CVS Health in 2015. At the time, he called Omnicare “a rock-solid company filled with passionate long-term care experts.”

Costing the company money

But long-term care-related legal actions also have cost the company money.

In May 2020, for instance, Omnicare agreed to pay a $15.3 million civil penalty to settle allegations that it violated federal law by allowing opioids and other controlled substances to be dispensed without a valid prescription.

Omnicare denied the allegations but settled the lawsuit “to avoid the expense and uncertainty of potential litigation,” a company spokesman told McKnight’s Senior Living at the time.

Separately and not specific to long-term care, on Wednesday, CVS announced an agreement in principle to pay approximately $5.2 billion over 10 years, beginning in 2023, to settle what Lynch described as “substantially all opioid laws and claims against CVS Health by states , political subdivisions and tribes.”

That outcome, she said, “is in the best interest of all parties and one that will help put a decades-old issue behind us as we continue to focus on delivering a superior health experience for the millions of consumers who rely on us.”

On the Wednesday earnings call, Lynch also noted that CVS had signed an agreement to sell online benefits enrollment/administration system creator bswift (to global investment firm Francisco Partners), a business she also described as “nonstrategic.” CVS had acquired the company as part of Aetna buy in 2018.

“As we divest assets, we will continue to invest in areas aligned with our strategy with a disciplined approach to capital allocation,” she said. The company also recently sold health savings account business Payflex (to Millennium Trust) and part of its Aetna international business, Lynch noted.

Not all sales

But it’s not all diversions for the company.

In September, CVS announced that it was buying Signify Health, a company focused on “health risk assessments, value-based care and provider enablement,” for $8 billion.

“This acquisition will enhance our connection to consumers in the home and enables providers to better address patient needs as we execute our vision to redefine the healthcare experience. In addition, this combination will strengthen our ability to expand and develop new product offerings in a multi-payer approach,” Lynch said at the time.

Wednesday, she said that the transaction is expected to close in the first half of next year, and she also hinted at future home-related spending.

“We said we wanted to be in the home. We’ll make investments around that,” Lynch said, echoing comments she made in September at the Morgan Stanley Global Healthcare Conference.

$3B+ revenue expected for segment in 2022

Despite the potential sale of Omnicare, CVS’ retail/long-term care segment is expected to see more than $3 billion in revenues in 2022 due to COVID-19, Executive Vice President and Chief Financial Officer Shawn Guertin said.

“It is not prudent to anticipate a similar level of COVID-based revenues going forward,” however, he said, “and we expect that the economics on vaccines and diagnostic testing will change following the expiration of the public health emergency, which we project will happen in the early part of the first quarter of 2023.”

Overall, the retail/long-term care segment, which includes CVS Pharmacy locations serving the general public in addition to Omnicare, “continues to outperform expectations,” Lynch said, with revenues of $2.67 billion in the quarter representing growth of almost 7% versus the prior year, with $1.4 billion in adjusted operating income, according to executives.

“Performance in both the front store and pharmacy was strong,” Lynch said, noting that front store sales were up approximately 4% and that demand for COVID vaccines and over-the-counter tests, as well as cough, cold and flu products, remains high.

The number of prescriptions filled, she said, grew 1.8% year-over-year in the third quarter, or 3.6% if COVID vaccines are excluded.

“This growth helped propel our retail pharmacy business to another quarter of year-over-year market share gains, extending a trend that started in the first quarter of 2020,” Lynch said.

In addition to its retail/long-term care segment, CVS also has a healthcare benefits segment and a pharmacy services segment.

Overall, Lynch characterized the quarter as “outstanding.”

“During the third quarter, we grew revenue by 10% versus the prior year to over $81 billion and grew adjusted operating income by nearly 4% over the prior year to $4.2 billion,” she said. “Adjusted earnings per share in the quarter was $2.09, an increase of over 6% from the prior year.”

Learn more about the company’s third-quarter performance on the CVS corporate website.

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