CVS Health (CVS -0.65%) has been on a buying spree as the company branches out beyond being a retail pharmacy and health insurer to become a primary care and health services company.
Last Friday (Oct. 7), Bloomberg reported that the company is competing with Humana Inc. to purchase Cano Health, a value-based care provider based in Miami. That's probably great news for Cano investors, but what does it mean, particularly in the long term, for CVS?
It's also important to note that, as of Monday afternoon, neither Cano nor CVS had confirmed that such talks were in place.
It fits in well with the company's mission
CVS' potential purchase of Cano, like its ongoing $8-billion purchase of Signify Health, will bolster CVS' primary-care offerings and capabilities. CVS has changed its business model by opening primary-care clinics in its stores and at other locations, such as inside Target stores. By buying Cano, CVS gets a company that has 143 medical centers in nine states and Puerto Rico, though all but 33 are in Florida, and said it expects to have 184 to 189 such facilities by the end of this year.
The move makes sense because CVS CEO Karen S. Lynch said while discussing the earlier Signify Health announcement that the company is looking to expand its primary care, in-home, and provider-enabled services. Cano Health operates in some of the same areas CVS does: pharmacy services, telehealth, and health management programs.
CVS, like many mature companies, has had a relatively slow rate of growth. But by utilizing its strong cash flows to buy companies such as Cano and Signify Health, it can, in effect, purchase growth while finding economy-of-scale savings. In addition, it makes sense for CVS to leverage its large retail footprint to boost sales in other areas, such as primary care, where it sees future growth.
The risk for CVS
News of the potential acquisition came out on Friday; that day, CVS stock dropped more than 10%. That's not unusual because the company making the acquisition frequently sees its shares drop while the prospective company being bought often sees its shares rise. Cano was up 9% on Friday but then down on Monday when no announcement was forthcoming.
To make such a purchase, CVS will be taking on Cano's $1.08 billion in long-term debt, and CVS already had $51 billion in long-term debt of its own at the end of the second quarter.
Cano may come considerably cheaper than Signify Health, though, because its shares have declined 2% this year, and its market cap of $4.3 billion is a little more than half what Signify Health's is. With non-profitable growth stocks taking a big hit so far this year, CVS may see Cano as a relative bargain at this point.
News of the deal also serves as a much-needed distraction for CVS regarding news that its Aetna National PPO healthcare plan had lost a star in its rating by Centers for Medicare & Medicaid Services (CMS), which rates Medicare Advantage and Medicare Part D prescription drug plans. That means the PPO won't be eligible for CMS's quality bonus payments in 2024. While CVS said the rating change wouldn't affect this year's revenue, it could have an impact in two years. However, it said it still plans to grow adjusted earnings per share (EPS) at low double-digit year-over-year rates in 2024.
How soon would the purchase be accretive, if ever, to CVS?
At the earliest, late in 2023. The upside for Cano is it grew overall membership by 80% year over year in the last quarter to 281,525, including 163,947 Medicare members. It also reported second-quarter revenue of $689.4 million, up 101% over the same period last year. Cano wasn't profitable, though, showing a net loss of $14.6 million. Considering the company's growth, if CVS buys the company, there will be certain cost savings CVS will likely find, though initially, costs will go up because of the acquisition and transition expenses.
CVS is in a solid position to take the short-term financial shock of acquisitions and benefit in the long term. Through six months (period ended June 30), the company reported revenue of $157.5 billion, up 11.1% year over year, with an EPS of $3.97, up from $3.78 in the first six months of 2021. The company also reported that it has paid down $1.5 billion in long-term debt. All three CVS segments (Health Care Benefits, Pharmacy Services, and Retail/Long-Term Care) are thriving. Through the first half of 2022, revenue for Health Care Benefits was up 11.8%, Pharmacy Service's revenue grew by 10.2%, and Retail/LTC) was up 7.7%.
The healthcare company's guidance, which didn't include the potential deals, was that it would likely have full-year EPS between $6.93 to $7.13, up from $5.95 in EPS in 2021, and full-year cash from operations between $12 billion and $13 billion, down from 18.3 billion in 2021.
