Feb 8, 2023
CVS Agrees to Buy Oak Street Health in $10.6 Billion Deal
(Bloomberg) -- CVS Health Corp. agreed to buy Oak Street Health Inc. in a $10.6 billion deal that further integrates primary care into the health-care conglomerate, positioning it to take advantage of a shift in how medical care is paid for.
The drugstore chain is paying $39 a share in cash for the Chicago-based company at an equity value of $9.47 billion, according to a statement Wednesday, confirming an earlier Bloomberg News report. The deal will be funded through available resources and existing financing capacity, CVS said, and is expected to close this year. CVS shares rose 4.8% at 11:42 a.m. in New York, while Oak Street gained 4.9%.
Amid a highly competitive environment for its longstanding pharmacy business, Woonsocket, Rhode Island-based CVS has been expanding into direct patient care via acquisitions, agreeing last year to buy health-technology provider Signify Health Inc., a deal expected to close in the first half of this year.
“CVS’s management team now has their work cut out for them, getting two transactions approved by regulators,” said Elizabeth Anderson, an analyst with Evercore ISI. She sees a roughly 80% chance the deal will be cleared, according to a note to clients.
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CVS and its rivals are following a path blazed by industry leader UnitedHealth Group Inc., integrating medical clinics with other services such as health insurance, prescription plans and pharmacies. In doing so, they’re responding to new incentives created by programs like Medicare Advantage, where the US pays private insurers a premium for managing patient care.
Under such arrangements, insurers can profit if they reduce medical expenses while providing quality care — by preventing unnecessary hospital visits, for example. They can also boost revenue by documenting patient illnesses, gaining extra payments when they enroll members with greater medical needs.
Gaining more direct control over care delivery allows insurers to better control costs and record patient diagnoses, crucial capabilities for succeeding in Medicare Advantage and programs like it. Acquiring companies like Oak Street and Signify will go a long way toward improving CVS’s ability to do just that. Owning provider assets also gives health-care companies another layer of profit, and unlike in the insurance business, there’s no regulation on how high provider profit margins can go.
The deal is Chief Executive Officer Karen Lynch’s largest since CVS purchased insurer Aetna for $68 billion in 2018. The company also held talks last year to buy health-care provider Cano Health Inc., Bloomberg News has reported. Cano gained 2.3% in New York.
Asked whether a deal for Cano Health deal remains in play, Lynch said CVS had planned to acquire just one primary-care asset and that Oak Street will provide alternative sources of revenue and growth for the long term.
“Combined with Signify, it will give us the most premier value-based care asset in the industry,” she said in an interview. She said she doesn’t comment on rumor or speculation.
Unprofitable to this point, Oak Street aims to reinvent care for Medicare patients with low incomes and chronic health problems. The company went public in 2020 and had 169 centers across the US providing care for more than 159,000 patients at the end of last year, according to a company filing. On an investor call, CVS executives focused on the long-term return on capital they see in Oak Street.
“After a thorough and robust review of the market, Oak Street was the primary-care asset that proved to be the most strategically and financially compelling,” CVS Chief Financial Officer Shawn Guertin said. “We project that our investment in Oak Street will drive double-digit returns on invested capital over time as clinics mature and synergies are realized.”
The Medicare Advantage business, long a growth engine for insurers and primary-care companies like Oak Street, is facing new challenges. Last week the Centers for Medicare and Medicaid Services proposed payment rates for 2024 that lagged industry’s expectations. If they’re finalized, it could pressure profit margins for insurers like CVS’s Aetna unit and their downstream medical providers like Oak Street.
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Those issues make it even more important to seek out high-quality Medicare Advantage value-based care assets, Guertin said. “As we think about navigating the future of Medicare Advantage,” he said, “both Signify and Oak are exactly the kind of assets that you would like to have at your side.”
CVS’s deal values Oak Street at a materially higher level than other primary care companies including Agilon Health Inc. and Privia Health Group Inc., SVB Securities analysts led by Whit Mayo wrote.
Shares of Oak Street more than doubled in the past year through Tuesday amid reports of negotiations with CVS. The shares rose as much as 33% Monday, giving the company a market value of about $8.2 billion. Private equity firms General Atlantic and Newlight Partners collectively own roughly 39% of Oak Street, data compiled by Bloomberg shows.
Credit Suisse Securities and Lazard Ltd. are financial advisers to CVS on the deal. Centerview Partners is advising Oak Street.
CVS’s adjusted earnings were $1.99 a share for the fourth quarter, beating analysts’ average estimate of $1.92, according to a separate statement. Revenue in the period was $83.8 billion, exceeding Street expectations for $76.3 billion.
Adjusted profit for the year will be $8.70 to $8.90 a share, the company said, reaffirming a forecast given last month. In the acquisition announcement, CVS said it is now targeting adjusted earnings per share of about $9 in 2024 and $10 in 2025. Those targets take into account factors such as closing the Oak Street deal, the loss of a pharmacy benefits contract from Centene Corp., lower quality ratings from Medicare that will affect reimbursement and expected contributions from a deal to buy Signify Health.
Despite headwinds including diminished concerns about the pandemic, which has led to fewer visits for Covid-19 tests and vaccinations that bring foot traffic into its stores, CVS’s retail sales beat estimates at $28.2 billion. They were helped by increased prescriptions, front-store volume and a severe cough, cold and flu season.
Sales in the company’s health-insurance unit of $23.03 billion also came in ahead of Street expectations. The unit’s medical benefit ratio, the percentage of premiums going to patient care, was 86%; analysts had estimated 85.02% .
“Last year was defined by outperformance across our foundational businesses, robust cash flow from operations and meaningful progress against our value-based care delivery strategy,” Lynch said in the statement.
(Adds CEO interview comments in second section.)
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