Oak Street Health: Poised For Growth Following RubiconMD Deal

Summary

• Oak Street Health is acquiring virtual specialty care provider RubiconMD for a c. $130 million cash consideration.
• The deal has clear strategic and financial merit, likely proving accretive to earnings over time.
• With plenty of growth in the pipeline, the current EV/Revenue valuation multiple appears compelling.

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Oak Street Health (OSH) made a bold step to allay investor concerns around the visibility into patients' medical spending and member touchpoints through its recent acquisition of RubiconMD, a provider of virtual specialty care. With a national network of +230 specialist providers in over 40 states, the purchase provides OSH with a platform that it can leverage to better manage its patient population and drive improvement in medical spending over time. With the deal also likely to accelerate OSH's longer-term digitization efforts and earnings growth outlook, I view the current valuation at 5-6x EV/Revenue as compelling.

Expanding Into Virtual Specialty Care via RubiconMD

OSH has disclosed the acquisition of RubiconMD, a virtual specialty care platform engaged in the provision of "eConsult" services to support clinical decision-making. Per the deal terms, OSH will acquire RubiconMD for c. $130 million in cash, of which c. $60 million will be in the form of an additional contingent consideration to be paid in cash or stock (depending on the achievement of key performance milestones). For context, RubiconMD currently operates a virtual network of 230+ specialist care providers across all major specialties, including Cardiology, Nephrology, and Pulmonology.

Source: Oak Street Health M&A Presentation Slides

Thus far, OSH has been focused on building out a preferred network of local, high-value specialists on the specialty care front, so the addition of RubiconMD's national network of virtual specialists will be a natural extension of the platform. Notably, OSH and RubiconMD already have an existing relationship, which should ease integration between the companies post-acquisition. Over the medium to longer-term, the plan is for RubiconMD to be integrated into Canopy (OSH's proprietary technology platform underlying every aspect of patient engagement and workflows), allowing it to become the first step in its specialist referral process. As things stand, the target is for most referral decisions to run through RubiconMD by fiscal 2023.

Unlocking the Cost Savings Opportunity

In addition to the strategic merits, the deal also makes good financial sense - per management, the deal is expected to reduce specialty spend by c. 10% by fiscal 2023 through a 3+x increase in OSH Specialists eConsults. Also notable is the fact that the average RubiconMD eConsult results in $500-$800 of savings and a c. 45% avoided service rate (across referral, diagnostic, and procedure). For context, specialty spending currently accounts for c. 15% of OSH's total medical costs, equating to c. $160 million in expenses, so the targeted savings could prove significant. Beyond cost savings, this initiative is also set to improve patient experience and clinical outcomes while reducing duplicative and avoidable medical spending, as Oak Street will be able to guide care to specialists within its network. As things stand, the current guidance calls for the realization of cost savings in H2 '22, with the savings run-rate further accelerating into fiscal 2023.

Source: Oak Street Health M&A Presentation Slides

Encouragingly, OSH also noted that these savings provide incremental margin upside to the previous medium-term adj EBITDA margin target of c. 20% (based on the historical performance of mature clinics). And longer-term, the addition of RubiconMD presents the opportunity to expand the OSH footprint as only a small number of specialty consults are currently routed from OSH to RubiconMD. Additional opportunities OSH can tap into include live specialist video consultations in its centers, which could drive extra savings over time (although management has yet to provide guidance on this).

M&A Strategy Unchanged as the Path to Turning EBITDA Positive Remains Intact

OSH has generally stood out among its peers (Cano Health (CANO) and CareMax (CMAX)) for its focus on organic growth over acquisitions as its core strategy. Even the RubiconMD deal can be seen as a platform deal rather than market expansion, so it was perhaps unsurprising that management continues to be biased toward utilizing partnerships (vs. a buy or build strategy). And with the integration unlikely to involve meaningful execution risk considering OSH has already worked with RubiconMD for a long time and recognizes the combination as an excellent cultural fit, the focus should remain firmly on the core strategy going forward.

Source: Oak Street Health M&A Presentation Slides

Longer-term, the rollout of value-based models into markets outside of California and Florida will be key – in this regard, OSH, with its presence in 19 states, has a demonstrated track record of rolling out a standardized offering nationally. In the near term, however, the aggressive growth focus is dragging on earnings, although retaining its first-mover advantage and track record is perhaps more important at this stage. As a result of its growth investments and new center openings, I see OSH remaining EBITDA negative into fiscal 2023, but with the large cohort of 2020, 2021, and 2022 de-novos reaching maturity in five years or so, OSH is on track to turn positive EBITDA in fiscal 2025, with a steep ramp from there as more cohorts reach maturity thereafter.

Final Take

Overall, I view the RubiconMD deal as a positive, with the acquisition likely to prove highly complementary to OSH's existing business and helping to mitigate concerns about the management of downstream costs. OSH shares currently trade at an EV/Revenue multiple at the upper end of the established clinic operator peer group comprising agilon health (AGL) and 1Life Healthcare (ONEM), although I view the modest premium as justified considering OSH's expansion track record. Over the medium to longer term, I see plenty of room for further multiple expansion as OSH continues to execute on its growth plans and inches closer toward turning EBITDA-positive.

Data by YCharts

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.