Will CVS’s $10.6 billion acquisition of Oak Street enhance its health-insurance and pharmacy businesses?

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CVS Health’s $10.6 billion acquisition of Oak Street Health will open up a new revenue source at a time when growth in its legacy pharmacy and retail businesses is expected to slow.

The deal to acquire Oak Street was formally announced Wednesday morning, along with the pharmacy giant’s expected strong fourth-quarter results. CVS said it plans to pay $39 per share in cash on Tuesday, a 16% premium to Oak Street’s closing stock price of $33.68. The acquisition is expected to close this year.

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shares of cvs cvs,
Shares rose 4.5% in trading Wednesday, while Oak Street stock OSH,
increased by 4.4%.

The purchase of Oak Street and its 169 clinics, which provide a range of primary care services to people covered by Medicare, fits perfectly with the company’s strategy to secure new sources of revenue, as well as its pharmacy and Health insurance businesses aim to control costs and utilization.

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“We view the CVS-OSH partnership as highly strategic, as it allows Aetna – the insurance arm of CVS – to develop novel value-based care (VBC) Medicare Advantage products in partnership with OSH,” William Blair analysts told investors Wednesday. design will allow.

According to a CVS spokesperson, Oak Street’s CEO, Mike Pykoz, will continue to lead the business under the new Health Care Delivery division within CVS, which is located in the retail business. The acquisition is expected to drive growth, yes, especially since Oak Street has launched plans to open at least 130 new clinics by 2026.

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But CVS CFO Shawn Guertin also told investors the acquisition would improve “our retention of Aetna.” [Medicare Advantage] members through the improved outcomes and experience provided at Oak Street Clinics, “in addition to making greater use of CVS Pharmacy and Caremark capabilities.”

According to its 2023 guidance, CVS expects the pharmacy services business, which houses its pharmacy-benefit manager, to grow 1% to 2% in 2023, while retail revenue is expected to grow 1% to 3%. In comparison, those two occupations are projected to grow by 10.6% and 6.5%, respectively, in 2022.

Primary care has long been seen as the front door to the American healthcare system. This is where patients with chronic health conditions go to refill prescriptions and seek care for new conditions. It is much less expensive than going to an urgent-care center or emergency room. Essentially, it’s a low-cost area of ​​healthcare with big impact.

The focus on “ownership” of primary care is the latest obsession for healthcare-hungry tech giants and legacy pharmacy chains and health insurers alike. amazon amzn,
Last year announced plans to buy direct primary-care provider One Medical ONEM,
for $3.9 billion. Walgreens Boots Alliance WBA,
and Cigna CI,
Urgent-care provider Summit Health is spending $8.9 billion to acquire CityMD. And we humans
Teamed with private-equity firm Welch, Carson, Anderson & Stowe to invest an additional $1.2 billion in a venture that seeks to build 100 primary-care clinics for seniors.

“Although [primary care] While a very small portion of total health spending, about 10% nationally, it will have a significant impact on health care access, CVS CEO Karen Lynch said Wednesday. “Individuals who seek routine primary care services report fewer serious medical diagnoses, lower mortality, and 33% lower annual health care expenditures.”

CVS has been telling investors for the better part of a year that it’s interested in building out its healthcare delivery business. (The company also operates about 1,000 retail clinics in its pharmacies and Target stores.) This interest was also a driver in its $8 billion acquisition of home-health provider Signify Health SGFY.
Which was announced in September.

“As we think about navigating the future of Medicare Advantage and perhaps even a broader opportunity in Medicare value-based care in fee-for-service populations, I think both Signify and Oak are exactly that kind of asset. Do what you want, by your side,” Guertin said.

Shares of CVS are down 18.8% over the past year, while Oak Street’s stock is up 113.9%. S&P 500 SPX,
is down 5.6% over the past 12 months.

Credit: www.marketwatch.com /

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