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CVS could look to regional buys as it plans primary care acquisitions

Executives of the health giant teased a potential acquisition during a Q2 earnings call as buys in primary care heat up. Who could it nab?

As it aims to compete with peers and strengthen its primary care network, CVS Health signaled it would use acquisitions to expand its primary care network and could use smaller, regional buys over larger ones to make its healthcare footprint more vertical.

The healthcare giant, while building up its virtual care network, MinuteClinics and retail presence, has lagged behind its competitors in the primary care arena as companies like Walgreens, Amazon and Walmart have made significant inroads into primary care with multibillion-dollar partnerships and deals.

That could change this year. Executives teased a potential acquisition during the company’s second-quarter earnings call on Wednesday, with CVS CEO Karen Lynch saying that the company would take its next steps into primary care by the end of the year.

“We can’t be in … primary care without M&A. We’ve been very clear about that,” Lynch said.

Primary care has exploded with regional players as private equity has focused on the primary care space, transforming the least-paying medical specialty into a market flush with cash. From 2010 to 2020 alone, researchers at NEJM, in an analysis of PitchBook data, found that total capital raised in the primary care space increased from $15 million to $3.83 billion, and that deals involving private investor backing shot up from two to 46. And, in the first half of 2021, primary care deals totaled $8.4 billion.

“There’s a huge footprint of players that we’re not even aware of at the national scale,” said Matthew Bates, managing director and physician enterprise service line lead at Kaufman Hall. “If I was going to place a bet, I would place a bet on a series of roll-ups.”

Multiple regional acquisitions or partnerships would solve a scaling problem with primary care network companies. Bates pointed toward One Medical, which Amazon announced it would acquire for $3.9 billion. One Medical has a presence in fewer than half the states in the country. The acquisition has a big price tag, and Amazon will have to pay even more to scale the company given its modest footprint. For example, Walgreens invested $5.2 billion into VillageMD to scale its primary care practices, Bates noted. 

Regional buys would also capitalize on existing care relationships in established markets without the company having to funnel additional cash to penetrate new markets. And, if it wanted, CVS could use its large healthcare tech stack — like its virtual primary care service — to quickly scale regional models.

CVS senior vice president of business development and investor relations, Larry McGrath, opened the possibility of multiple acquisitions during the company’s earnings call, adding that there was “no one and done asset” in the space to grow their primary care network.

“We’ve been very active in evaluating a wide range of assets in and around the care delivery space,” McGrath said. “And what I would reiterate is that our priority areas remain primary care.”

A regional acquisition, or multiple, would open up new acquisition targets to CVS given that few national primary care targets remain that have not publicly exited or been acquired. Companies that have exited with a public debut include Oak Street Health, which went public in 2020 and P3 Health Partners, which went public via a merger with a special purpose acquisition company.

“There is no national player that’s in all 50 states and is a natural target,” Bates said.

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