Weekly Reads
Weekly Reads - August 21, 2023

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CVS loss of Blue Shield California is overblown both on its impact to earnings and its impact on the long-term growth trajectory of the overall PBM business.

CVS shares were under pressure last week as the market sold off the stock in the wake of news that Blue Shield California was dropping CVS as its pharmacy benefit manager. Blue Shield California plans to contract with multiple partners to deliver its pharmacy benefit choosing to work with Amazon, Mark Cuban’s Cost-Plus Drug Company, Abarca, and Prime Therapeutics. CVS will continue to offer specialty drugs for members with complex conditions which is the largest and highest growth service in the PBM value chain. BlueShield is claiming that this new setup will save nearly $500 million annually by simplifying its price structure and eliminating hidden fees. We remain skeptical that this new setup will deliver even close to what Blue Shield is claiming since this new setup has five vendors doing the same work that CVS did previously. This new setup is likely to add more complexity with five vendors who are each much smaller than CVS having to work in conjunction to deliver massive cost savings. It’s hard to believe a band of smaller vendors will be able to match the discounts that the biggest PBMs are often able to negotiate or offer the level of service as CVS. The loss of this customer has a minimal impact on CVS’ earnings with Blue Shield California accounting for less than 1% of CVS’ earnings per share. This seems like another overblown headline driven by the negative reputation of PBMs and most likely will have no impact on these businesses long-term outside of short-term stock price volatility. 

The over hiring of tech talent during the pandemic continues to infect top tech companies with a glut of workers in these companies underworked and overpaid contributing very little to the top and bottom line.

The top U.S tech companies have admitted they were overzealous during the pandemic over hiring due to expectations that demand would continue to rapidly grow post-pandemic. Companies like Meta and Alphabet have started purging some of these excess workers, laying off thousands and promising a more efficient cost structure. However, many low-impact workers remain in these companies wasting resources and having a minimal impact on revenue or profits. This article in Fortune highlights the life of Devon, one of these low-impact workers working at Alphabet, who claims to work one hour a week spending the rest of his week working on his start-up. This is not a one-off story with a 2021 anonymous survey by the forum Blind revealing that one-third of tech workers only worked for less than half of the workday. Devon, who makes $150,000 a year according to his offer letter, believes he was hired so he wouldn’t go to another company that builds products that compete directly with Alphabet. Even amid intense layoffs many of these workers remain, giving the impression they are working full days but splitting their work time with other projects. This could be an indication of a culture issue at Alphabet with Devon admitting that he targeted a position at Alphabet after interning at the company and working under two hours a day with him taking a week vacation on company time. In a company as large as Alphabet with a much more relaxed company culture, these issues are bound to happen far more often due to less oversight and bureaucracy than in a typical startup. Even so, management must prioritize fixing this issue and preventing this type of attitude from infecting other departments or potentially facing long-term cultural consequences that could be difficult to fix.

Old Dominion is looking to seize a golden opportunity to grow its LTL network by turning the terminal assets of the now bankrupt LTL company Yellow into new service capacity the company can use to consolidate market share across the U.S.

Old Dominion, one of the two largest less-than-truckload(LTL) carriers, has raised its bid for recently bankrupt LTL operator Yellow’s terminal network. This offer surpasses last week’s bid of $1.3 billion by rival Estes for Yellow’s 160 terminals across the country. Old Dominion and Estes are one of the hundred bidders who have expressed interest in Yellow’s assets as Yellow seeks the best offer in order to repay its debts. The top bidders are Old Dominion and Estes, the two largest LTL companies with 255 and 280 service centers respectively. This deal could be transformative for both companies, allowing them to expand their network by over 50% in one deal, giving them excess capacity to take in new demand stemming from Yellow’s collapse. More importantly, both companies would consolidate market share in key markets creating a barrier to entry for smaller competitors. The bidding for Yellow’s real estate assets could just be starting to heat up as neither LTL leader wants its closest competitor to have access to valuable real estate that would strengthen their LTL network.