By Atin Narain, Devina Aggarwal, Nathaniel Mathew and Omar Ali (Yale University), Xunliang Huang (University of Melbourne)
Photo: Sam Moghadam Khamseh (Unsplash)
Overview of the deal
Acquirer: CVS Health
Target: Oak Street Health
Total Transaction Size: $10.6bn
Closed Date: February 8th, 2023
Target Advisors: Centerview Partners (Financial), Kirkland & Ellis LLP (Legal)
Acquirer Advisors: Credit Suisse and Lazard (Financial), Shearman & Sterling LLP, Dechert LLP, and McDermott Will & Emery (Legal)
CVS Health Corp, a healthcare company, has agreed to acquire Oak Street Health, a healthcare network of primary care centres for adults on Medicare, in an all cash deal of $39 a share which represents an enterprise value of about $10.6 billion. This recent acquisition demonstrates CVS Health’s motivation to expand into the primary care market in an effort to “ influence the overall cost of care,” according to CEO of CVS, Karen Lynch.
Vertical integration has been a key trend in the healthcare industry. Take CVS for example: in the past two decades, CVS has acquired an insurance company (Aetna), a pharmacy benefits manager (Caremark), launched its Minute Clinic, and is now expanding into more clinical care services. This is all with the intention of offering accessible and convenient care for a wider range of clients.
Ultimately, CVS believes that the integration of Oak Street will provide synergies that will not only expand the network of primary care centres that Oak Street has, but also help to grow the overall operating income of CVS itself.
“Combining Oak Street Health’s platform with CVS Health’s unmatched reach will create the premier value-based primary care solution. Enhancing our value-based offerings is core to our strategy as we continue to redefine how people access and experience care that is more affordable, convenient and connected.” - Karen S. Lynch, Health President and CEO (CVS)
Company Details (Acquirer - CVS Health)
CVS is an American healthcare and pharmacy company that operates a chain of retail pharmacies, specialty pharmacies, and walk-in health clinics. CVS's main product and service offerings include prescription drugs, over-the-counter medications, health and wellness products, and healthcare services. The company operates over 9,900 retail pharmacy locations across the United States and Puerto Rico. CVS also operates walk-in medical clinics, called MinuteClinics, which offer a variety of basic healthcare services, including flu shots, physical exams, and treatment for minor illnesses and injuries.
Founded in 1963 headquartered in Woonsocket, Rhode Island
CEO: Karen S. Lynch
Number of employees: 300,000
Market Cap: $110.1bn (as of 26/2/2023)
LTM Revenue: $321.6bn
LTM EBITDA: $19.7bn
LTM EV/Revenue: 0.51x
LTM EV/EBITDA: 8.4x
Recent Transactions: $8bn acquisition of SignifyHealth (Sep 2022); $77bn acquisition of Aetna (Dec 2017); $12.9bn acquisition of Omnicare (May 2015)
Company Details (Target - Oak Street Health)
Oak Street Health is a healthcare company that operates primary care clinics across the U.S.. Oak Street Health's product and service offerings are focused on delivering high-quality primary care to seniors on Medicare, with a focus on providing personalised, patient-centred care. This includes a range of services such as comprehensive primary care, chronic condition management, and coordination of care with specialists and other healthcare providers. Oak Street Health also offers additional services such as social activities, transportation assistance, and access to community resources to help support patients' overall health and well-being.
Founded in 2012 headquartered in Chicago, Illinois
CEO: Mike Pykosz
Number of employees: 5,200
Market Cap: $8.6bn
LTM Revenue: $2.2bn
LTM EBITDA: ($432.7mn)
LTM EV/Revenue: 4.4x
LTM EV/EBITDA: n.m.
Projections and Assumptions
Oak Street Health provides direct treatment to over 159,000 patients annually, predominantly those with Medicare enrollments. Given an upward of 50% of Oak Street's clients have either a food, shelter, or isolation risk factor, CVS sees a substantial opportunity in the venture to address healthcare expenses and enhance the outcome performance, particularly in areas that have been previously overlooked. CVS Health finds Oak Street's business model scalable and attractive because it is tech-enabled and value-based. Oak Street's care model is supported by Canopy, its in-house technology platform that determines the optimal level and care for every patient.
CVS Health continues to project adjusted earnings per share for 2023 in the range of $8.70 to $8.90, with an estimated adjusted earnings per share of approximately $9 in 2024. The annual earnings per share for CVS Health in 2022 was $3.14.
Although Oak Street has had tremendous growth and benefits from its value-based clinical philosophy, it continues to function at a loss. The clinic owner is predicted to lose more than $200 million in 2023 and to not turn a profit until at least 2025. In the short term, this acquisition might, therefore, put additional pressure on CVS’ capital priorities such as share buybacks and negatively impact its profitability.
By using CVS' present real estate portfolio, a partnership with Oak Street would likely accelerate Oak Street's expansion, which is currently anticipated to include nearly 40 new clinics in 2023. In 2022, CVS announced that it will acquire home healthcare agency, Signify Health. Should both transactions close, combining Oak Street and Signify would enable the merged firm to scale its operations and provide additional care for Medicare Advantage subscribers at home, in hospitals, and through telehealth.
With the backdrop of major players in the health sector moving into the primary and urgent care delivery space since the COVID-19 pandemic, CVS decided that it is a strategically sound move to acquire Oak Street. The acquisition received a positive market reaction as CVS shares were up by 4.5% following the announcement of the strategy. There are three reasons for long term upsides to be created.
Firstly, CVS and Oak Street can leverage each other’s existing customer base. Oak Street is to benefit from referral of customers CVS reaches in home health assessments, whilst CVS is to benefit from Oak Street’s customer base to offer prescriptions from CVS pharmacies.
Furthermore, Oak Street gains access to more capital for growth due to CVS’s deeper pockets. Oak Street opened up 40 new centres in 2022 and now has approximately 600 primary care providers spread over 169 medical centres across 21 states. However, Oak Street’s growth initiatives and customer centric approach has resulted in dramatic increases in its operating and other expenses year on year, namely a 48% increase in medical claim expense due to the addition of new customers, a 49% increase in cost of care, due to centre and employee growth, and finally a 38% increase in sales and marketing, driven by higher centre-based outreach activity. After the merger, with access to additional capital and potential operating efficiencies, Oak Street may be able to reduce costs, and further expand the number of clinics from 169 to 300 by 2026.
Finally, CVS is able to improve retention of Aetna Medical Advantage patients who seek care at Oak Street clinics. CVS acquired Aetna, a leading health insurance provider, in 2017 for $68 billion. The latest acquisition of Oak Street allows Aetna to gain a more insightful understanding into the operations of primary care facilities. In turn, it allows Aetna to create potentially more attractive health insurance policies, particularly in the Medicare space.
Risks and Uncertainties
Despite the above-mentioned upsides that the merger might bring, the downsides are severe if the post-merger consolidating steps are not executed appropriately. The key risk originates from the potential conflict of interest between a healthcare based conglomerate such as CVS versus a primary health provider such as Oak Street. Whilst CVS and its subsidiary companies have a greater focus on delivering a profit, primary health workers’ have a more ‘patients first’ attitude.
As a result, CVS should take the time to understand the operating culture at Oak Street and avoid the temptation for corporate conformity. To illustrate, it might be essential for CVS to protect Oak Street’s health care-delivery culture, which includes maintaining different HR processes, different compliance requirements, and different financial management systems and personnel.
Furthermore, CVS should focus closely on talent retention. In clinical companies, clinician-patient relationships should not be overlooked. This means that during the deal completion phase, the current 600+ primary care providers that Oak Street owns should be reassured that no major operational changes will take place that may affect their practices, to ensure such clinician-patient relationships are retained.
“This agreement with CVS Health will accelerate our ability to deliver on our mission and continue improving health outcomes, lowering medical costs, and providing a better patient experience while offering significant value to our shareholders." - Mike Pykosz, CEO (Oak Street Health)