- The Amazon-One Medical merger is currently offering an ~8% annualized return.
- The main reason for the spread seems to be potential antitrust issues.
- However, transaction approval seems likely as Amazon has a limited presence in the primary care market while the industry is highly fragmented and One Medical has a negligible market share.
- A review of similar industry transactions and FTC’s ruling history also suggest the merger should pass the regulatory scrutiny.
Here's an interesting large-cap merger arbitrage play. Amazon (AMZN) is expanding into the healthcare space by acquiring primary care provider 1Life Healthcare (ONEM). Consideration is all-cash and stands at $18 per ONEM share, implying a spread of 4% at current prices. Companies have not provided an expected closing date but assuming a somewhat conservative six-month timeline, annualized return here stands at 8%.
The merger requires ONEM shareholder and regulatory antitrust approvals. Equity holder approval seems likely given the offer's large premium and ONEM's lackluster financial performance so far. The main reason for the spread seems to be regulatory approval. Recently, senators Josh Hawley and Amy Klobuchar issued letters, expressing concerns about Amazon potentially dominating the primary care market as well as acquiring vast amounts of personal health data. The lawmakers urged the FTC to investigate the transaction but the commission has not launched any probe into the merger so far. While regulatory risk remains, I see multiple reasons why the acquisition is likely to close:
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Amazon and ONEM have rather minimal horizontal overlap as Amazon's current primary care offerings are small in scale. Review of FTC's decisions since Jan'21 reveals that mergers were mostly blocked due to significant horizontal overlap. Meanwhile, potential vertical integration with Amazon's pharmacy business should also not raise antitrust concerns.
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The US primary care market is highly fragmented and ONEM captures only a negligible market share.
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Similar industry transactions, primarily Walgreens' (WBA) acquisition of VillageMD, suggest that antitrust pushback is unlikely.
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Concerns over AMZN acquiring patient health data seem to be addressed by the US Health Insurance Portability and Accountability Act (HIPAA) which protects patient private health information.
Downside to the unaffected share price is 43%. However, interestingly ONEM has attracted interest from US healthcare giant CVS Health (CVS) who in June made an acquisition offer valuing the company at $18/share. Apparently, the parties did not come to terms as ONEM required non-exclusive negotiations and the transaction to be finalized in an expedited timeline given Amazon's interest in the company. Considering previous interest from CVS Health, the downside in this setup could be protected in case of a deal break.
Businesses and Overlap
ONEM operates a chain of primary healthcare clinics. The business is based on a membership model where the company charges a fixed monthly subscription fee and in exchange provides regular primary care services. The company focuses on both physical appointments and digital offerings (so-called telehealth), including online visits and mobile application.
Meanwhile, Amazon's healthcare businesses include Amazon Care and Amazon Pharmacy (previously Pillpack). Care business is similar to ONEM as it provides primary and urgent healthcare with a focus on telehealth services. Clearly, the merger will allow Amazon Care to expand its primary care offerings, particularly in the employer/commercial market (as opposed to the Medicare-insured population) which has been the focus of the company. That said, Amazon Care is still a tiny business - as of 2021, it served only 40k individuals compared to 736k for ONEM - suggesting there is little horizontal overlap.
Admittedly, vertical integration with Amazon's pharmacy business is likely. Moreover, ONEM's membership-based model could fit nicely into Amazon Prime. Here, however, it is important to mention the benefits such vertical integration can lead to. Besides expected convenience benefits for consumers (e.g. one Prime subscription for health appointments/pharmacy shopping), the merger is likely to increase competitive pressure on other pharmacy retailers/primary care providers. Moreover, with the transaction Amazon effectively shifts into the role of pharmacy benefit manager, eliminating any "middleman" companies between drug manufacturers/suppliers and primary care providers. This suggests potential for lower prices and more efficient processes. Overall, given ONEM's small market share and other acquisitions of primary care providers by large retailers (discussed below), I do not expect vertical integration to be an issue.
Primary Care Market
The US primary care market, which includes both commercially- and Medicare-insured populations, was estimated at $870bn as of 2021. The industry is highly fragmented as it includes multiple care models, such as physician-led Medicare, employer-sponsored health clinics and retail clinics. To illustrate this, there are more than 126k physician groups, the largest of which, the Permanente Medical Group, serves a reported 12.4m of patients - less than 4% of the US population. Meanwhile, one of the largest retail clinics - CVS-owned Minute Clinic - had 2.8m patient visits in 2021 while Walgreens' VillageMD was responsible for 1.6m patients. Another up-and-coming industry player, Carbon Health , served 2.6m patients in 2021. Notably, these patient figures extend beyond primary care services and include surgical and medical specialty visits, among others.
Looking more specifically geography-wise, ONEM operates in 25 markets with an additional four expected to be launched in 2022. The company estimates these 29 markets to have a total of $275bn in primary care spending, expecting further expansion in the future. For comparison, ONEM generated $623m in sales in 2021. Moreover, the company runs clinics primarily in large metropolitan areas, such as New York and Los Angeles, where competition from other primary care providers is the most intense. These facts suggest that the company does not have any tangible market share in any of these geographies.
Similar Acquisitions
A good data point seems to be Walgreens Boots Alliance's acquisition of primary healthcare provider VillageMD. In 2020, WBA announced a $1bn investment in VillageMD. Subsequently, in Oct'21, the pharmacy retailer increased its investment by $5.2bn, acquiring a controlling 63% stake in the company. I see several similarities of this transaction with the merger at hand:
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Both WBA and AMZN operate large retail pharmacy businesses. Granted, Amazon Care is online-based versus mostly physical stores that WBA operates. Having said that, WBA is a giant pharmacy chain and captures the second-largest market share in the prescription drug market at 18%. WBA had total sales of $132.5m in 2021 (though this includes primary care and other healthcare service-related revenues). Amazon does not disclose prescription drug revenues, however, other retail pharmacy products, such as OTC medications, were estimated at around $30bn in 2021.
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VillageMD is a similarly-sized (slightly larger) primary care market player compared to ONEM as indicated by the number of patients serviced (1.6m versus 0.8m for ONEM). Revenues as of 2021 were expected at $1.3bn compared to $623m for ONEM. Additionally, VillageMD also performs alternative medical arrangements, such as text/phone care and video visits.
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Acquisition sizes are somewhat similar - $6.2bn versus $3.9bn that AMZN pays for ONEM.
Other notable mergers involving pharmacy retailers:
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UnitedHealth's (UNH) acquisition of DaVita primary care unit for $4.9bn.
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Walgreens' purchase of a majority stake (55%) in home care provider CareCentrix in 2021. Total valuation of $800m.
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Walmart's (WMT) acquisition of a telehealth company MeMD in 2021.
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Cigna (CI) buying telehealth vendor MDLive in 2021.
Data Concerns
Current legislation, more specifically the HIPAA act, does not allow healthcare providers to share patients' health data without patients' consent. Admittedly, the law was enacted in 1996, meaning that it might be outdated. Two senators have recently asked the US Department of Health and Human Services ((HHS)) to update the law. While I am not an expert in the field, it seems that any revisions to the law would be a positive for the merger at hand given that they would protect the patient in a more comprehensive manner.
Meanwhile, Amazon has stated that all health-related data would be "handled separately from all other Amazon businesses as required by law" and any information would not be shared without patients' permission. Even though there might be concerns over how AMZN will link its patient and retail customer data, the fact that ONEM serves only ~0.8m patients suggests that this is unlikely to be an issue here.
FCC
As already mentioned in my Black Knight write-up , since Jan'21 the FTC has mostly blocked mergers where the buyer and the target had significant horizontal overlap. Only two transactions were blocked on vertical integration grounds - Lockheed Martin-Aerojet Rocketdyne and Illumina-Grail . However, both cases involved companies operating in monopolistic markets - this is hardly the case with ONEM as the primary care market is highly fragmented. Another recent transaction involving another Big Tech company and worth highlighting is the Meta-Within Unlimited merger . The FTC filed a lawsuit opposing Meta's (META) acquisition, claiming that it will stifle competition in the VR market. However, here it is important to note that Meta is already a dominant player in the VR space, unlike Amazon who has only a limited presence in the primary care space.
Financials
While ONEM's top-line has grown in recent years, the increase has been somewhat moderate. Moreover, it is important to mention that some of the recent growth has been inorganic - in Sep'21 ONEM acquired Iora Health which has significantly boosted the company's Medicare revenues. The company is yet to post a profitable quarter. Cash burn from operating losses stood at $244m in 2021 and the company is on track to burn another ~$380m in 2022. Current net cash position is at $352m (without deducting $311m in senior convertible notes), suggesting the company has a one-year cash runway absent any other debt/equity financing. In this light, the merger seems appealing for ONEM's shareholders/management given the buyer's financial resources.
2018 | 2019 | 2020 | Q1'21 | Q2'21 | Q3'21 | Q4'21 | 2021 | Q1'22 | Q2'22 | |
Sales () | 213 | 276 | 380 | 121 | 120 | 151 | 231 | 623 | 254 | 256 |
Commercial () | - | - | - | - | - | 121 | 131 | 493 | 127 | 124 |
Medicare () | - | - | - | - | - | 30 | 100 | 130 | 127 | 132 |
Cost of Care () | 136 | 168 | 235 | 70 | 68 | 78 | 103 | 319 | 101 | 107 |
G&A () | -86 | 109 | 157 | 64 | 77 | 93 | 89 | 323 | 97 | 92 |
Loss from Operations () | -45 | -54 | -71 | -32 | -43 | -73 | -96 | -244 | -93 | -97 |
Net Loss () | -46 | -54 | -89 | -39 | -41 | -79 | -96 | -255 | -91 | -94 |
Shareholders
ONEM's shareholder base is mostly institutional as the top six institutional holders, such as Vanguard, Blackrock and Carlyle, have a combined ~35% stake. Adding the other institutional holders, the count should easily exceed 50%. Given this passive ownership stake, approval for a transaction announced at a large premium seems likely.
Conclusion
The AMZN-ONEM merger seems very likely to go through. The companies have little horizontal and vertical overlap while the primary care market is highly fragmented. The FTC's merger review history also suggests that any pushback would be unprecedented. Given this, the setup seems to offer a high-probability of 8% annualized returns if the transaction closes before the year-end.
For further details see:
1Life Healthcare: Amazon Merger Unlikely To Face Regulatory Pushback