CVS Health filled headlines during the J.P. Morgan conference in San Francisco this week through a series of investments and even a rumored $10 billion acquisition of value-based primary care company Oak Street Health. The moves will make the company a dominant figure in the healthcare industry, one expert said.
“I think it really highlights the capabilities they’ve built on the investment side,” said Michael Greeley, co-founder and general partner of Flare Capital. “They’ll be a force to reckon with in our industry, in a good way. I think they’ll be a really desired partner.”
Woonsocket, Rhode Island-based CVS Health announced investments in three companies: $100 million to Carbon Health, a primary care and urgent care company; a contribution to a $375 million funding round for Monogram Health, a value-based provider of in-home care for those living with polychronic conditions; and $25 million to Array Behavioral Care, a virtual mental health care provider. Additionally, CVS Health is reportedly exploring an acquisition of Oak Street Health, which runs primary care centers for Medicare beneficiaries, Bloomberg reported Monday.
Greeley said he’s not surprised by the rumored Oak Street deal. CVS Health has long made its interest in primary care clear, as well as home care through its plan to acquire Signify Health for nearly $8 billion. The company may also be facing pressure as competitors make moves in the M&A space. Amazon announced its plan to acquire primary care company One Medical for nearly $4 billion in July, and Walgreens-backed VillageMD recently closed on its $8.9 billion acquisition of Summit Health-CityMD, a provider of primary care, specialty care and urgent care.
“Certainly, with some of the major acquisitions that have been announced over the last couple of quarters, there is a competitive response … There aren’t a lot of high quality, nationally focused assets left,” Greeley said in an interview.
Another industry expert doesn’t quite see the deal with Oak Street happening, however. Oak Street is currently burning a lot of cash as it grows its business, said Blake Madden, founder of industry newsletter Hospitalogy.
“Given CVS’ capital commitments and profitability guidance, dropping another $10 billion on an asset that requires additional investment and drags on earnings (unlike Signify, which should be accretive) doesn’t make financial sense to me,” he said in an email. “That being said, anything is possible and CVS has been on the hunt for something for a while. Perhaps they get creative with a deal structure that includes cohort earnout provisions or even brings in a financial partner to help close the deal.”
The $100 million investment in Carbon Health makes more sense to Madden, as it allows CVS Health to still do something in the primary care space, and for not too much of a cost. Carbon Health will use the funding to move into new markets, sign new value-based care arrangements and advance its technology. CVS Health will also pilot Carbon’s model in some CVS locations.
“CVS gets access to interesting Carbon assets, including a custom-built EHR and its new Connective Care primary care model, along with piloting the Carbon urgent care model in certain CVS stores,” Madden said. “And all they had to spend was $100 million for a pretty great brand name in Carbon Health, a deal that doesn’t impact the balance sheet at all but still moves the needle for their business.”
To Christina Farr, principal at OMERS Ventures, the Carbon Health investment could point to a potential acquisition down the line.
“I suspect this is a way for CVS to compete with Optum, especially as it pertains to the consumer/retail strategy,” she said. “I don’t have firsthand knowledge, to be clear, but it could also signal a potential acquisition down the line as is sometimes the case after strategics make growth stage investments.”
CVS Health CEO Karen Lynch shed light on the company’s plans during a presentation at the J.P. Morgan conference Tuesday. She said CVS Health has three strategic priorities: primary care, home health and physician enablement to value-based care. The Signify Health deal, which is expected to close in the first half of the year, is part of the home health and physician enablement strategy, and the company is continuing to look for ways to expand their reach in primary care, she said.
“We’ll continue to work diligently to identify additional assets, including primary care capabilities, that will complement our foundational businesses and further advance our strategic vision,” Lynch stated.
In response to the Oak Street rumors, CVS Health told MedCity, “We don’t comment on rumors and speculation.”