At the end of 2021, CVS Health CEO Karen Lynch laid out a strategic vision for the drugstore retail chain to expand beyond pharmacy services. During the company’s investor day more than a year ago, Lynch and company executives detailed plans to enhance the company’s capabilities in health services and primary care.
With its proposed $10.6 billion acquisition of Medicare-focused primary care player Oak Street Health, which was announced Wednesday morning, CVS is moving forward aggressively on that strategy.
This latest deal comes just five months after CVS said it would spend about $8 billion in cash to buy Signify Health, a home health and technology company.
Back in August during the company’s second-quarter earnings call, Lynch said CVS, which operates nearly 10,000 drugstore locations across the country, is looking to enhance its health services in provider enablement, home health and primary care.
CVS’ intent to buy Signify Health checks the first two boxes while Oak Street Health checks the third one.
“Oak Street Health has a proven senior-focused primary care model that is scalable at a national level. We see a significant opportunity to expand in the next few years and provide superior care to many more patients,” Lynch said during CVS’ fourth-quarter earnings call Wednesday.
In a press release, CVS highlighted that by combining its health services and Oak Street Health, the company will have a “premier value-based care enterprise” as Oak Street employs more than 600 primary care providers and has 169 senior-focused medical centers across 21 states.
The company specializes in treating Medicare Advantage patients and its network of clinics is expected to grow to over 300 centers by 2026, with each offering $7 million in potential embedded earnings before interest, taxes, depreciation and amortization, according to the company. CVS expects the merger to drive more than $500 million in synergy potential over time, bolstering its long-term growth goals.
The company also is projecting low double-digit adjusted earnings per share growth as a result of the transaction, according to an investor presentation.
The deal marks the latest example of vertical integration in healthcare. In addition to operating thousands of pharmacies and MinuteClinics, CVS also is the parent company of major health insurer Aetna and pharmacy benefit manager CVS Caremark.
“With a primary care business, as well as in-home evaluations solutions with Signify and a retail presence, CVS Health is becoming one of the most dominant forces in healthcare services,” BTIG analyst David Larsen said in a recent research note.
The Oak Street Health announcement comes about three months after another primary care player VillageMD, which is backed by rival Walgreens, said it would shell out nearly $9 billion to pick up medical practice Summit Health, which owns urgent care clinic chain CityMD. That deal also included a major investment by insurer Cigna.
“While this transaction has been talked about for a while, we are somewhat surprised at the pace with which the market is moving,” Larsen wrote.
The all-cash deal for Oak Street, for $39 a share, is expected to close in 2023 and represents a significant premium over the company’s most recent closing stock price on February 7. Based on Oak Street’s revenue guidance for 2023 of around $3.1 billion, the purchase price provides an implied revenue multiple of 3.4x, according to analysts.
“We estimate that recent dynamics in the market, including Cigna’s investment into VillageMD and Amazon’s acquisition of One Medical, well as potential pressure on Medicare reimbursement, drove up the price CVS Health is willing to pay for Oak Street Health,” Larsen wrote.
There’s at least one group already opposed to the deal. Nonprofit antitrust advocacy group American Economic Liberties Project said the Federal Trade Commission should immediately seek to block a potential transaction, according to a statement on its website.
“By purchasing Oak Street Health, CVS hopes to take even more of control of insurance, doctors, medical records, and pharmacies across the country,” said Sara Sirota, policy analyst at the American Economic Liberties Project in a statement. “It’s clear that CVS’s goal is to become another Big Medicine giant like UnitedHealth Group, where payers and providers can coordinate special compensation, referral privileges, and medical record surveillance while undermining independent healthcare businesses and patient privacy.”