Word on the [Oak] Street: CVS isn't buying



Illustration: Gabriella Turrisi/Axios
CVS Health (NYSE: CVS) isn't likely to buy Medicare-focused primary care operator Oak Street Health (NYSE: OSH), analysts, bankers and advisers told Axios on the sidelines of the J.P. Morgan Healthcare Conference last week.
Why it matters: Despite reporting to the contrary in Bloomberg last week, after which OSH stock rose from a Jan. 6 low of $21.65 to a Jan. 13 high of over $30, a deal would make little practical sense, sources tell Axios.
Details: Bloomberg said the deal would value Oak Street at more than $10 billion including debt.
- OSH stock Tuesday morning fell slightly from Friday's high to $29.49 a share.
- Major shareholders include General Atlantic (25.27% stake) and Newlight Partners (13.4%).
Reality check: CVS currently has several balls in the air, and an additional OSH-shaped orb is likely to prove a distraction at a time when profitability is important to the company, sources tell Axios.
- CVS is trying to close its $8 billion deal for Signify Health (NYSE: SGFY) in the current quarter. That deal is currently under DOJ review, and a new buy could threaten that process.
- During the J.P. Morgan Healthcare Conference, CVS announced minority bets on three other companies: $100 million to hybrid primary and urgent care company Carbon Health, a contribution to a $375 million funding round for home care business Monogram Health, and $25 million to virtual provider Array Behavioral Care.
By the numbers: CVS in November adjusted expected 2023 profit to a range of $8.70 to $8.90 per share (higher than the 2022 adjusted earnings forecast of $8.55 to $8.65 a share) and said it hoped to mitigate the hit from a performance rating decline for its most popular Medicare plan (Aetna's National PPO) by encouraging members to shift to other plans.
- Also recall that CVS agreed to pay about $5 billion over 10 years to settle lawsuits over how its pharmacies handled prescriptions for opioids.
- CVS reportedly looked into acquiring primary care company Cano Health before ultimately stepping away.
What they're saying: This brand of speculative leak is particularly beneficial for publicly traded primary care companies that aren't performing well — which currently is most of them.
- "[I]n the first conversation, they say we want to buy you. Then they dig in, they look, and they’re not willing to pay," one banker told Axios.
- "Assuming CVS wants a large presence in primary care, with brick-and-mortar locations, we estimate that a Carbon Health [private] or Forward Medical [private] might make more sense," BTIG analyst David Larsen wrote in a note Jan. 10.
- "[I]f you're CVS, why drop $10 billion on an asset that's currently burning cash at an implied 3.3x revenue multiple today? Unless they get creative with deal structure, I can't see it happening," wrote Hospitalogy founder Blake Madden in a LinkedIn post Friday.
- The Signify deal checked key boxes on CVS' care services agenda, including home health and physician enablement. Although Signify didn't fit the traditional definition of its third box — primary care — the Carbon Health bet certainly does.
The bottom line: "Do I think they’re buying OSH? I don’t think they have the money right now," one banker said.