Following an unverified report by Bloomberg News suggesting that CVS Health Corporation (CVS) is seeking a partnership with a private equity firm to develop its Oak Street Health segment, the company experienced a decline in its stock value of over 3% on Thursday.
Analysts at RBC Capital Markets expressed their dissatisfaction with the sharp decline in the stock value, deeming it excessive.
“The approach of collaborating with private equity firms to establish new clinics is not a new concept. We believe it could be a prudent approach to maintain credit ratings and sustain financial liquidity. Additionally, as CVS expands its primary care health services, it may mitigate adverse impacts on earnings due to initial losses,” they said.
The analysts stated, “While we believe this strategy could enable CVS to defer some of its financial commitments to clinic development, we anticipate the social assistance segment may focus on improving margins in the Medicare Advantage program over the next few years.”
According to the report, CVS Health may pursue a collaboration model similar to the one between Humana and Welsh Carson. In such a model, CVS would initially have a smaller stake in new clinics and could have the opportunity to fully acquire them once they are well-established. Humana aims to open 150 centers by 2025 and integrate them after a five-year period.
In contrast, RBC predicts that Oak Street clinics will break even between the third and fourth years and expect them to generate $6 to $7 million in clinic-level profit by the sixth year. This strategy shields CVS from the initial losses incurred during the formation years of the clinics.
“The advantage of forming joint ventures with private equity is the isolation of CVS’s earnings from the initial losses incurred during the establishment years of the new clinics,” the analysts added.
Source: investing.com
