Amazon’s [NASDAQ:AMZN] USD 3.9bn offer last month for 1Life Healthcare [NASDAQ:ONEM] is likely to spur new M&A interest in an often-overlooked space: primary care doctor groups.
Consolidation moves among high value-added specialty medical, dental and veterinary groups have been raging for years, but Amazon’s move into the space could be a harbinger for others to see value in what proponents see as an essential gateway for care in a dysfunctional US healthcare system.
“Primary care is really suboptimal – if you industrialize it and use technology, you can improve it. That’s the premise,” says Les Funtleyder, healthcare portfolio manager at investment fund E Squared Capital.
Target practice
Amazon, a titan of retail disruption, has made healthcare a stated priority, but has not always achieved its goals. It formed an alliance called Haven with JPMorgan and Berkshire Hathaway in 2018 to streamline healthcare delivery, but shut it down in 2021.
Still, Amazon’s move for 1Life, d.b.a. One Medical, a major primary care doctor group, shines a spotlight on other large physician groups, even as valuations for publicly traded entities such as Oak Street Health [NYSE:OSH] and Cano Health [NYSE:CANO] have suffered.
Everside Health, a major private equity-backed primary care doctor group, withdrew a planned IPO this summer amid a market downdraft, but still managed to raise a USD 164min funding round last month, evidence that investors continue to see significant upside.
“The direct healthcare industry is now very much in play,” says the CEO of one major private equity-backed primary care doctor group. “With Amazon-One Medical, the gun went off and there will be more consolidation.”
Groups that offer healthcare services to large employers, such as Everside, Marathon Health and Premise Health, could all be targeted.
Fresh-blooded buyers
Likely buyers of such groups include major insurance carriers like Humana [NYSE:HUM] and UnitedHealth [NYSE:UNH], industry watchers say. UnitedHealth has built what is likely the biggest network of doctors groups in the US through acquisition, including the purchase of Houston-based Kelsey-Seybold Clinic in April.
Another serial acquirer could be CVS Health [NYSE:CVS], parent of the eponymous pharmacy chain, which is building a network of in-store clinics with affliated primary care doctor groups. Its strategy reflects moves of competitors such as Walgreens Boots Alliance [NASDAQ:WBA], which owns a 63% stake in private equity-backed VillageMD following a USD 5.2bn investment late last year.
Amazon, which ventured into the prescription pharmacy space with the USD 750m purchase of specialty drug supplier PillPack in 2018, is likely to use the purchase of One Medical as a similar platform from which to build a national primary care doctor service, says one industry executive. “To serve national employers, you need to be national,” the executive notes. “They will have to do it both organically and inorganically.”
Valuation inflation
Constrained supply is likely to jack up valuations across the primary care space. “There aren’t that many big, well-run businesses,” says one healthcare investment banker. Doctor groups, which are typically partnerships that lack a strong central management team, “need to be professionalized and scaled for the big acquirers to go after them.”
The expected valuation boost from Amazon’s move is bringing cheer to private equity executives who hold large doctor group assets. But those higher valuations could negatively affect their buy-and-build strategies too. As one executive puts it, “It reshuffles the deck when a deep-pocketed guy like [Amazon founder Jeff] Bezos wants to be in primary care.”
