CVS Health Tinkers, Teladoc Totters, Moderna Tanks
Takeaway: The probability of big commercial success for a business locked in the conceptual past is low. Ditto for its managers.
Updates since original publication on August 6, 2024:
September 19 to integrate the publication of Mirror, Mirror 2024, the Commonwealth Fund’s eighth report since 2004 comparing the health systems of 10 high-income countries
October 1 to integrate CVS Health plans to layoff 3,000 “corporate roles”
October 15 to integrate Walgreens plans to close 1200 stores in the next three years
October 18 to integrate Moderna’s belief that the driving force for its future sales will be its flu-COVID vaccine
October 18 to integrate CVS replacing CEO Karen Lynch amid tanking shares, activist pressure
October 20 to integrate activist Starboard Value taking stake in Kenvue
October 21 to integrate the blast furnace meltdown of the New York Jets vs. the Pittsburgh Steelers
Listen to Hardcore Zen
Clearing the Past
On the EBITA from the United States’ $5 trillion investment it makes every year in healthcare, via The Failing U.S. Health System published as an editorial in the New England Journal of Medicine earlier this month:
“The United States is failing to fulfill one of the most basic responsibilities of any country: preventing needless suffering and death. The United States falls short when it comes to both protecting the health of individual people and promoting societal well-being [i.e., ‘the production of affordable health’ as the basis for economic competition]. These shortfalls are glaringly apparent in Mirror, Mirror 2024, the Commonwealth Fund’s eighth report since 2004 comparing the health systems of 10 high-income countries: Australia, Canada, France, Germany, the Netherlands, New Zealand, Sweden, Switzerland, the United Kingdom, and the United States. This edition of the report, which we coauthored, is the first to account for the effects of the Covid-19 pandemic on the comparative performance of health systems.
The study is based on 70 measures of health system performance, grouped into five domains: access to care, care process, administrative efficiency, equity of care, and population health outcomes.
The United States ranks last overall on these measures of performance and last or nearly last in four of the five domains. This record is all the more distressing because of the country’s exorbitant expenditures on health care, which far exceed those in any other high-income country. As the graph shows, Americans get much less value for the money they invest in their health system than people in other high-income countries….”
The EBITDA of a $5 Trillion Investment in “Healthcare”
From Blumenthal D, Gumas ED, Shah A, Gunja MZ, Williams RD II. Mirror, mirror 2024: a portrait of the failing U.S. health system: comparing performance in 10 nations. New York: Commonwealth Fund, September 19, 2024
CVS Health announced last week that Big PBM veteran David Joyner will succeed Karen Lynch as CEO, who was replaced on Thursday before announcing its earnings that once again fall short of Wall Street expectations. The move comes as CVS struggles to drive higher profits and stock performance.
In August, Lynch had fired Aetna president Brian Kane (“We are disappointed by the current performance and outlook for the Health Care Benefits segment, and I have decided to make leadership changes. Effective immediately, Brian Kane is leaving the company.”)
August was also the month when Joyner, together with Patrick Conway, the CEO of UnitedHealth’s Optum Rx and Adam Kautzner, the president of Cigna’s Express Scripts, were accused of lying during a July hearing (“The Role of Pharmacy Benefit Managers in Prescription Drug Markets”), and were sent letters by James Comer, the Chairman of the House Committee on Oversight and Accountability, gave them an opportunity to correct their statements or face potential fines or jail time.
CVS Health — like its ‘market cousins’ Walgreens (stock at a three-decade low) and Rite Aid (in bankruptcy), as well as its “ecosystem partners” UnitedHealthcare (lost $40 billion in market cap last week), Elevance Health (lost $15 billion in market cap last week), GSK (shares “sliding on vaccine woes”), Moderna (stock at a 4-year low), Pfizer (“struggling to claw back faith with Wall Street”), Teladoc Health (stock down nearly 50 percent so far this year), and VillageMD (up for sale by Walgreens after a $6 billion write down) — is dealing with strategic collapse of the economic system of which it helped build and now has helped break.
Practically no one wandering the maze of complexity is able to forecast with much accuracy, to say nothing of navigating their way out of exponentially amplifying change 'out there' in the ether somewhere.
The Wall Street Journal in CVS Shares Fall After Earnings Warning, CEO Ouster:
“CVS is making the changes after repeatedly cutting its forecasts for this year’s financial performance, moves that led to a 19% decline in its share price this year as of Thursday’s close, a push for changes by a major hedge fund and a board review of strategy that included the option of breaking up the company.
CVS is now planning to announce third-quarter results that will fall well below Wall Street expectations, largely due to continued issues at its Aetna insurance unit, and to back away from its most recent full-year earnings projection for 2024, issued in August. A new downgrade would represent the fourth since the company’s investor day in December 2023.
Joyner and Farah said in an interview with the Journal that CVS will now move forward intact.
“We believe that we have a really important part to play in terms of simplifying and delivering a better healthcare experience for this country,” Joyner said. CVS’s assembled assets will allow it “to actually deliver on the promises that we’ve made, and now it’s all about execution.”
Joyner will face a difficult task. Not only must he turn around CVS’s Aetna health-insurance business, but he must also contend with Federal Trade Commission scrutiny of pharmacy benefit giants including Caremark. CVS also faces longstanding challenges in the retail pharmacy business.”
In a statement on Friday, Glenview Capital said it respects and supports Lynch’s departure from the company and looks forward to engaging with Joyner. The firm called for CVS to refresh its board of directors. “We believe the Company’s culture, governance and leadership should be strengthened by those with both appropriate industry experience as well as fresh perspectives (emphasis added) and that the Company would be best served through prompt Board evolution,” Glenview said.
The Era of Bleak Prognosticating
The only surprise in the news hurricane last week is anyone who continues to be surprised. The harsh news is that instability and disequilibrium are the norms.
There is so much change working through our systems these days, it feels like a whole new magnitude. The biological nature of the new economic order means that the sudden disintegration of established domains (e.g., the ‘retail pharmacy market’ or the ‘medicare advantage market’ or the market in covid/flu vaccines) will be as certain as the sudden appearance of the the new. If business and government leaders treat The Strategic Direction Thing shruggingly, it’s because we still have our remnant contexts to take refuge in, old industry models whose operations we can continuously try to “optimize” and tweak with the help of advisors and extensive slide decks. It’s actually not that hard to imagine a future where people not only are not sustained by any sense of coherence, but who see no argument against floating weightlessly from here to there without a strong notion of origins or destination.
Which is the real problem: “optimization” and “efficiency” are signs of death and decay, not improvement and evolution.
Joyner sent an internal memo to all the remaining employees of CVS, which Bloomberg obtained:
“Here’s where I need your help,” Joyner said in an internal memo sent to staff on Friday seen by Bloomberg News. “It is no secret that our industry faces significant and dynamic challenges, and that CVS Health must make financial and operational improvements to drive elite execution and maintain our position as a leading health care company,” he said.
He takes over the company following months of upheaval, including missed earnings targets, activist interest, and shareholder unrest that spilled into public view in recent weeks.
In the memo, Joyner said that in order for the company to be successful, it needed to “operate as one CVS Health.”
“A single team that does many things every day to help more than 100 million Americans achieve greater access, better affordability, and superior care,” he said.
Here's what CVS Health "helping more than 100 million Americans achieve greater access" looks like in reality:
Newly Created Pharmacy Deserts —
Nearly 800 ZIP codes that had at least one pharmacy in 2015 now have none.
via "The Powerful Companies Driving Local Drugstores Out of Business: The biggest pharmacy benefit managers are profiting by systematically underpaying independent drugstores, creating “pharmacy deserts” across the country" -- the New York Times, Oct. 19, 2024
Most earnings calls and content from/for executive leadership has this sort of static drift quality to it, a peripherality that is more ornamental wave than meaningful conversation with nuance and insight. You literally don’t have to read any of the content to know what it says, because it all says the same thing the same way. The same words recycle themselves in an infinite and infinitely recursive loop, a pattern of energy that leads to a sort of inertia, a context of insignificance and incrementalism spanning generations.
Everyone is trying to navigate the “continued challenges in a tough economic environment” armed with cliche, confusing operations for strategy, and trying to squeeze more life out of obsolete modes of being and seeing and thinking. A $5 trillion system of markets is locked in the conceptual past.
On his first earnings call as CEO of Teladoc Health, which withdrew its financial outlook for 2024 (the company’s net loss swelled to $837 million, and was hit by a $790 million goodwill impairment charge because of the worsening performance at BetterHelp, its mental health business):
"I'm also gratified to see such a strong focus on patient safety, clinical quality, and health equity, as well as an organizational understanding of the importance of more holistically supporting the physical and mental health needs of people. Not only are these important aspects from a care perspective, but also represent key points of differentiation in the marketplace to build upon. From a technology perspective, we have important capabilities that will be essential to driving the business going forward."
Change comes in three wavelengths: There are changes to the game; changes in the rules of the game; and changes in how the rules are changed.
It's legacy thinking -- not technology -- that's maybe the biggest barrier to navigating the transition space. Leadership teams become kinetically-trapped in outmoded structures, orientations, incentives and schools of thought, doomed to be, always, in defense of whatever business model allowed them to be successful in the first place. Which is why Moderna’s Stephane Bancel, in an interview last week with Pharma Japan, still “believes the driving force for its future sales will be the flu-COVID combination” even though the business potential premised on the technical potential for flu-Covid vaccines has evaporated. Just ask Pfizer or GsK. The public is "tired" and "burned out" from all things virus-related. (It also didn't help the forecast when the executive leader of the United States declares "the pandemic is over").
It should surprise no one when Moderna earnings disappoint.
It should surprise no one when all the "elite execution" that money can buy at CVS Health doesn't deliver on quality growth. It should surprise no one when the "extensive slide decks" supporting the multi-billion dollar investment theses of Starboard Value, who this morning took a big stake in Tylenol-Maker Kenvue, don't work out as theorized.
The Big Miss will be this:
The ‘drug market’ and the ‘retail pharmacy market’ and the 'telehealth market" are not separate and distinct. You have to understand them interactively, as one system of thought.
“Patient Centricity” is a Fossil
Attention is no longer a given; it has to be strategized.
You certainly can’t argue with the spirit of a business like CVS Health or Moderna: both that want to “help Americans achieve greater access, better affordability, and superior care.” But as a base layer for advantage against equally resourced rivals like Pfizer or UnitedHealthcare, a “strong focus on the patient” has lost its ‘kinetic potential’ to power much of anything beyond cost cutting. As a frame of attention — a cognitive ingredient — for strategic differentiation, the messaging sits at the extreme end of monotonous repetition. It has run out juice.
“Elite execution” starts with better strategy stories, not bigger slide decks.
If the objective is restoring business/shareholder value, presumably by constructing new growth curves that can be sold to The Street, the skill in short supply is better system vision. A $5 trillion system of markets needs different, larger words to compose a fresh response to rampant commoditization and commercial withering across the board, save for the small handful.
For the most part, we’re either asking the wrong questions, or our questions are based on the wrong framework. Healthcare is one of the most hellishly complex businesses in the world. Many with deep pockets and expert knowledge have attempted to "fix" it; none have been successful. To quote the internal memo Nokia leadership wrote shortly before it collapsed: You can’t iterate on a burning platform.
More bluntly: A dinosaur in a fur coat is not a mammal.
"You've got to have culture changers in the midst of the talent to steer things in the right direction," Aaron Rodgers lamented after the blast furnace of a meltdown he led against the Pittsburgh Steelers last night.
Really big growth curves in healthcare start with a new format of interaction between markets. The objective is not “data interoperability” but market interoperability. “Strategy” becomes the imagination and skill to align the ‘commercial determinants of health’ — intentionally combining markets into storylines of system value. Which is what a One CVS Health should be aiming for: it's 'positional value' as a keystone to enable and manage a portfolio of new industry ecosystems.
More to the market innovation point:
Shareholder value is not just about business performance. It’s also about story performance.
"For over 20 years, there has been a bipartisan consensus among healthcare experts and policymakers that value based care that is integrated, patient centered and outcome focused is superior to the often fragmented and unnecessarily expensive fee-for-service system," said Andrew Witty on UnitedHealthcare's analyst call last week. "Across four presidential administrations, CMS has called for private-public innovation in the development of value based care models in Medicare and Medicaid. It provides better outcomes for patients. It saves money for the customers and taxpayers who fund care."
It's precisely this 20-year-old narrative, across four presidential administrations, that no longer performs as a story with energy to power anything other than structural stalemate. The words themselves are running on the watery residue of the past.
A Different Center-of-Gravity
Pure “strategy” reshapes environments. It changes the center-of-gravity from which to compete and create new sources of power, new feedback loops (“flywheels”) and new control points that establish the frameworks by which others have to play.
The American Way of healthcare is protected by many weapons of mass entrenchment. It is controlled by information asymmetries that sustain a $5 trillion system of markets riding the rails of actuarial tables that were built decades ago, methodological persistence buried deep in the bedrock, managed by ‘core administrative platforms’ that define “value” and squeeze analysis of human behavior into absurdly narrow channels. It’s a form of economic thinking that produces incoherence, not progress.
Again from The Failing US Health System:
"Coming during the run-up to the 2024 elections, these findings raise basic questions for candidates for positions at all levels of elected office in the United States: What is the future of a country that allows an untold number of its people to suffer and die unnecessarily because of a lack of access to basic health services, inadequate public health measures, and a tattered social safety net? Can it survive and thrive? Wittingly or unwittingly, Americans will be addressing these questions when they cast their votes on November 5."
It's the leadership margin that separates.
Or more specifically, the legacy margin, the elevated purpose that motivates above 'shareholder value' and big compensation packages and what Wall Street believes is the path to better performance.
Because the true danger from groupthink on such a staggering level is that the stories we now tell ourselves do not envision a better ending, much less a different way ahead.
Bouncing around from quarter-to-quarter doesn't work as a market strategy in healthcare. Just ask Walmart. The big money comes through patience.
Just ask Jeff Bezos.
/ jgs
John G. Singer is Executive Director of Blue Spoon, the global leader in positioning strategy at a system level. To engage with a mind stretch: john@bluespoonconsulting.com