CVS Health Absorbs Signify Health To Grow Further In Healthcare Market

A CVS Pharmacy store, Pittsburgh, Pennsylvania, USA

Althom

Last week, news broke that drugstore chain CVS Health (NYSE:NYSE:CVS) agreed to acquire Signify Health (NYSE:NYSE:SGFY) in what is ultimately a multibillion-dollar transaction. To some observers, this particular transaction may seem peculiar since CVS Health is often portrayed as just a drugstore chain, while Signify Health focuses more on value-based payment programs associated with the healthcare space. But when you really understand that CVS Health continues to push itself to transform from being just a drugstore retailer to being set up as an integrated, diverse healthcare enterprise, the deal makes a lot more sense. All in all, the long-term outlook for CVS will likely prove positive, with this acquisition and other recent initiatives pushing the company in the direction that it wants to go. But I do feel as though the real winner from this transaction will be the shareholders of Signify Health. Although that company has been doing well to grow on both the top and bottom lines in recent years, shares were undeniably pricey based on the agreed-upon buyout price. So while it may seem odd to say, it does look as though both sides are walking away from this better than before, with more of the immediate benefit accruing to Signify Health’s shareholders while the longer-term potential lies with the investors in CVS Health.

A look at the CVS and Signify deal

Conceptually, the transaction between CVS Health and Signify Health is fairly simple. The management team at CVS Health has agreed to acquire all of the outstanding stock in Signify Health at a price of $30.50 per unit in cash, placing an equity value on the company of $7.6 billion. The enterprise value, meanwhile, should come out to around $8 billion. Prior to the deal being announced, shares of Signify Health were priced at $28.77. But as recently as August 19th of this year, its shares were trading as low as $21.20 each. This translates to a premium on the stock in that time frame of 43.9%.

Historical Financials

Author – SEC EDGAR Data

For shareholders in Signify Health, the benefit here is simple to understand. The cash payment translates to a hefty premium in a short period of time. But of course, some investors may view the transaction as being insufficient when it comes to justifying the real value of the enterprise. Naturally, the argument here will likely center around the kind of growth that Signify Health has achieved over the past few years, with revenue soaring from $337.9 million in 2018 to $773.4 million in 2021. During this time frame, the company also saw its bottom line results improved markedly. The business went from generating a net loss of $28.9 million to generating a net profit of $19.7 million. Operating cash flow grew from $35.6 million to $129.9 million, while if adjusted for changes in working capital, it would have risen from $37.7 million to $130.4 million. And when it comes to EBITDA, growth has also been impressive, with the metric growing from $79.1 million in 2018 to $171.2 million in 2021.

Top line growth for Signify Health continued into the 2022 fiscal year. Revenue in the first half of the year, for instance, came in at $462.7 million. That’s 17.8% above the $392.8 million generated one year earlier. While this was definitely a positive, profit figures for the company were somewhat mixed. The firm went from generating a net loss of $23.2 million to a net loss of $381.4 million. Operating cash flow also suffered, declining from $66 million to negative $35.5 million. On the other hand, the adjusted operating cash flow multiple for the enterprise actually grew from $61.5 million to $82.2 million, while its EBITDA expanded from $89 million to $107.6 million.

Historical Financials

Author – SEC EDGAR Data

It’s truly difficult to understand what the future holds for a standalone Signify Health. But management did have high expectations when it came to the 2022 fiscal year. They previously forecasted revenue of between $845 million and $858 million. At the midpoint, that would translate to a 10.1% increase over what the company generated one year earlier. Some of this was driven by acquisition-related activities, while organic growth was forecasted to come in at about 4.1% year over year. The only profitability metric that management provided guidance for was EBITDA. The forecast there was for a reading of $251.2 million. If we assume that adjusted operating cash flow would have risen at a similar rate, then that metric would have risen to $191.3 million. This translates to a forward price to adjusted operating cash flow multiple of 39.7 and to a forward EV to EBITDA multiple of 31.8. In the grand scheme of things, these are fairly lofty levels for almost any business.

Trading Multiples

Author – SEC EDGAR Data

As for CVS Health, this acquisition essentially helps the company further transform into an integrated, diverse healthcare business. The management team at CVS Health even went so far as to saying that the acquisition will play a ‘critical role’ in advancing the health care services strategy the company is focused on while also giving it a platform to accelerate its growth in value-based care. Management seems to be particularly interested in the acquisition’s ability to enhance its connection to consumers in the home and in enabling providers to better address patient needs as it seeks to redefine the health care experience in America. Management is also interested in the potential here to expand and develop new offerings in a multi-payor approach.

When you consider the overall business model of Signify Health, this makes a lot of sense. According to the management team at Signify Health, the company offers a variety of solutions. For instance, under the Home & Community Services operations that it has, it makes available in-home health evaluations using a mobile network of credentialed providers in the US. Through these, the company creates a comprehensive, documented record of the clinical, social, and behavioral needs of its health plan customers’ medically complex populations and works to further engage them with the health care system. They use the data from these customers to perform advanced data analytics in order to seek the highest priority individuals for an in-home health evaluation and they then engage those members to schedule visits first said evaluations to be performed. Driven in large part by the COVID-19 pandemic, the company also transitioned to providing these in-home health evaluations using telehealth capabilities. In short, this is basically the same kind of evaluation but done virtually. For certain customers, the company also uses social determinants of health to refer individuals directly to community-based organizations in its network to help address issues such as food insecurity, slip and fall risk, social isolation, and more.

Investor Presentation

Signify Health

Under the Episodes of Care Services segment, the company develops provider networks, builds software, and delivers services that support the organizations it works with. It also offers financing of healthcare centered around a patient episode of care. The customers it focuses on include the payors offering episode-of-care programs, as well as providers who participate in said programs while delivering healthcare services. Management has also said that the company is the largest convener participant in the Bundled Payments for Care Improvement Advanced Program that involves the company holding contracts directly with the Centers for Medicare and Medicaid Services. And in this segment, the company also provides a variety of other services like helping accountable care organizations manage the post-acute care of patient populations, offering health plans a solution to manage the clinical needs and well-being of their members who have complex chronic health conditions, and working to transition patients from a hospital or post-acute care facility back to their homes.

This kind of business should fit in well with what CVS Health currently offers. At present, the enterprise consists of three key operating segments. The smallest of these, accounting for $82.2 billion, or 24.5% of the company’s overall revenue, is the Health Care Benefits segment. That unit operates as one of the nation’s leading diversified healthcare benefits providers, with around 35 million people being serviced as of the end of the 2021 fiscal year. This particular segment offers a broad range of traditional, voluntary, and consumer-directed health insurance products and related services to its customers. It also provides workers’ compensation administrative services, and other activities. The Pharmacy Services segment, which is the largest that the company has, accounting for $153 billion, or 45.6% of overall sales, Provides a full range of pharmacy benefit services like plan design offerings and administration, formulary management, retail pharmacy network management services, mail order pharmacy activities, and more. And the Retail/LTC Segment of the company works by selling prescription drugs and other products and services to its customers, including the MinuteClinic walk-in medical clinics that it makes available to its customers. This particular unit was responsible for 29.9%, or $100.1 billion, of the company’s revenue in 2021. It was also, last year, responsible for dispensing an impressive 26.4% of the total retail pharmacy prescriptions across the country. Adding in another unique company to the mix further diversifies the company and adds to the value chain in order to best serve customers in the long run.

Takeaway

At the end of the day, it’s difficult to know exactly how much use that CVS Health can get out of its purchase of Signify Health. But more likely than not, the company will be able to leverage its massive footprint to create additional growth for itself and its shareholders. In the long run, I suspect that the acquisition will be looked upon favorably by shareholders in the enterprise. As for investors in Signify Health, I would make the case that there should be an appreciation of the move. They get a significant premium on where shares were trading previously and this serves to transfer the risk of further growing the enterprise onto a larger party that can easily bear it. While there will undoubtedly be some investors who think the premium should have been higher, especially given the company’s cash flow growth recently, I don’t think the purchase should be looked upon in a negative light in that regard at all.

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