Axios Pro: Health Tech Deals

January 17, 2023

Axios Pro Exclusive Content

Happy Tuesday, Health Tech Readers.

1 big thing: The case against Oak-CVS

Illustration of a red cross being torn in half.

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 Erin.

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 told 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.

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.

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