CVS pays exorbitant $10 bln price to diversify

Illustration shows CVS Health and Oak St. Health logos
CVS Health and Oak St. Health logos are seen in this illustration taken February 8, 2023. REUTERS/Dado Ruvic/Illustration

NEW YORK, Feb 8 (Reuters Breakingviews) - CVS Health (CVS.N) keeps marching ahead with its plan to create an American healthcare colossus. Its latest acquisition involves paying $10.6 billion, including debt, to buy Oak Street Health (OSH.N). The company, which runs 169 primary care clinics treating older patients, might generate both extra revenue and some savings for various parts of its proposed new owner. The price tag, however, presupposes too much success.

The industry dynamics are helping prescribe such combinations. A move toward value-based care, with payments based on outcomes rather the services provided, is afoot in the United States. Assessing patients carefully, providing preventative care and ensuring a doctor’s recommendations are followed have become the new benchmarks. CVS is buying home-healthcare assessment provider Signify Health (SGFY.N) for $8 billion, and now Oak Street, to beef up its capabilities.

There are other benefits, too. Oak Street can use CVS pharmacy benefits to generate additional sales. Having more doctors also means CVS-owned insurer Aetna can steer patients to Oak Street’s cheaper clinics rather than expensive emergency rooms.

Here's how the strategy could work out. The number of Oak Street clinics should double by 2026, generating over $2 billion of adjusted EBITDA. Ignore the adjustments and put them on the 7 times multiple at which CVS trades, and the deal might be worth more than $14 billion by then. It would amount to around a 10% annualized return before factoring in the $500 million of revenue uplift and cost savings that CVS boss Karen Lynch is projecting. Yet growth, especially from mashing two companies together, is easier to forecast than to deliver. And primary care, as Oak Street’s losses show, has never been much of a money spinner.

The deal also looks expensive because rivals such as (AMZN.O) also are snapping up medical practices. CVS is valuing each Oak Street healthcare provider at more than $17 million, and each patient at about $67,000. Those are hefty sums for assets that could decamp.

Despite its aggressive reinvention efforts, CVS has generated only a 34% total return for shareholders over the past five years, according to Datastream. The S&P 500 Index (.SPX) delivered twice as much, suggesting that Lynch may not have the right financial diagnosis.

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CVS Health said on Feb. 8 it had agreed to buy Oak Street Health for about $9.5 billion, or $39 per share. The price represents a roughly 73% premium to the target’s undisturbed price. Including debt, the deal is worth $10.6 billion.

Oak Street runs 169 clinics that offer primary care, predominantly to older patients covered by Medicare. It has approximately 600 healthcare providers on staff, and 159,000 patients.

In September, CVS agreed to buy Signify Health, a home healthcare provider mostly for Medicare patients, for $8 billion.

Editing by Jeffrey Goldfarb and Amanda Gomez

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