CVS Health CFO Shawn Guertin

Primary Care

CVS Acquires Oak Street, Reports Strong 2022

CVS said it was going to do it. People doubted CVS would do it. CVS did it.

To say that the retail health giant’s fourth quarter revenue beat was overshadowed would be an understatement, but in case your internet was out this week: CVS acquired Oak Street Health for $10.6B ($39/share).

Here’s the Q4 report by the numbers, then we’ll get to the juicy stuff:

• Full year revenue of $322.5B, up 10% (Caremark up, Aetna up, Retail up)
• CVS now 5th largest US company by revenue after Apple, Amazon, Walmart, United
• Full year net income of $4.2B, down 48% ($5B of opioid lawsuits didn’t help)

Now for Oak Street. The general idea behind the acquisition is also the title of its snazzy investor presentation: Creating the Premier Medicare Value-Based Care Platform.

• Oak Street Health employs 600 primary care physicians across 169 clinics. It focuses on capitated primary care for Medicare Advantage and Medicare (59k at-risk patients).

• Unlike many of the other primary care operators left on the market after Amazon / One Medical and VillageMD / Summit, Oak Street has locations in 21 states – decent enough proof that the model is scalable and translates to different geographies. 

• It’s also one of the only companies that checks every box on CVS’ list: strong leadership; integrated tech platform; agnostic to different geographies and payors; demonstrable capability to improve outcomes; clear path toward profitability. 

As for synergies, CVS sees 500 million of them, or at least five that can unlock $500M in value.

• Accelerating Oak Street patient growth through CVS Health channels
• Improving Oak Street’s economics through integration with CVS assets
• Improving the retention of Aetna MA members through the Oak Street experience
• Driving greater utilization of CVS Pharmacy and Caremark capabilities
• Reducing costs from external public company and lease expenses

The Takeaway

CVS is a big company, and it needed to acquire a big player to move the needle in primary care. Although $10.6B is a hefty cost – and definitely a result of the physician M&A wars that CVS helped start – it only represents a 3.1x multiple on Oak Street’s project revenue for 2023. By comparison, Amazon forked over a 2.9x multiple for One Medical half a year ago.

Looking ahead, CVS expects Oak Street to expand to 300 clinics by 2026 at its current growth trajectory and without any further boost from the acquisition. When asked about this on its conference call, CVS said that it’s “exploring alternative avenues of accelerating synergy realization.” Buzzword Bingo. That means CVS doesn’t have a plan to speed this up yet, but it’s looking into it.

Either way, it’s hard to imagine that CVS’ existing scale won’t help make this work for both sides. CVS unlocks extra capacity with 1,100 MinuteClinics, has Aetna plans that can highlight Oak Street, and might soon have Signify home visits bringing patients into the ecosystem. This is a tipping point acquisition, and it’ll be exciting to watch.

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