One Medical Acquisition: The Path Forward

Last week’s $3.9 billion acquisition of One Medical (NASDAQ: ONEM) by Amazon triggered significant hyperventilating about the transformative and immediate impact of this transaction on the health care industry. Interestingly, Amazon’s market capitalization increased 1.4% or $18.3 billion on the day of the announcement, paying for the purchase a few times over. Undoubtedly there could be exciting near-term benefits for the 750,000 ONEM members as their Amazon Prime accounts are linked to their ONEM memberships, facilitating targeted Whole Food and Amazon Pharmacy coupons. But what we might expect to see over time is a provocative debate with powerful implications for how each of us manage the arc of our health care journeys.

Important Disclosure: Flare Capital was a significant investor in Iora Health and had a board seat. Iora Health was acquired by ONEM in September 2021 for approximately $2.1 billion and is an important part of the ONEM story going forward. Amazon now has an important foothold in the Medicare market. This is not meant to be a victory lap as the stars of the Iora Health story were squarely the management team, particularly the founding CEO, Rushika Fernandopulle. And while Rushika may have been the lead actor, the supporting cast numbering in the several dozens and too many to list here played a critical role in that company’s extraordinary success (raised nearly $350 million, sold for $2.1 billion).

Indeed, it does appear that Amazon is methodically stitching together a series of assets that over the next few years will better reveal the scope of its health care strategy. With significant fanfare, the January 2018 the formation of the health care consortium Haven with Berkshire Hathaway and J.P. Morgan was one of the first markers placed by Amazon in health care. While ultimately unsuccessful, this was followed up quickly with the June 2018 acquisition of PillPack for $750 million, which became the cornerstone of Amazon Pharmacy. The enthusiastic press coverage earlier this year about the expansion of Amazon Care to 20 cities was particularly notable. Easily overlooked were all of the important health care hires made by Amazon over the last five years, each one received with a quizzical look at the time but now look prescient and coming into better focus.

And running in the background are the numerous other Amazon initiatives such as Alexa and Ring doorbells which have rapidly proliferated robust, intelligent, and all-seeing (all-knowing) sensors in and around millions of homes and other health care settings.

The industrial logic of this transaction looks very compelling — at least in the abstract. In the ongoing effort to improve outcomes while lowering costs, the health care industry is shifting sites of care from high-cost acute settings to lower cost post-acute settings (i.e., the home). Overlay the “consumerization of health care” trend, greater awareness of the role that social determinants play in one’s health, the move to value-based care models, and the heavier cost burdens placed on employers further amplifying their voice in health care purchase decisions, Amazon’s decision to acquire a leading, branded primary care platform with 188 practices in 25 major markets with a particular focus on the employer customer (ONEM has more than 8,000 corporate clients) is fairly straight forward. The creation of Haven, while considered a failed experiment by many, tipped Amazon’s hand years ago.

Now let’s dream a little. According to U.S. Department of Health and Human Service estimates, the total per capita lifetime health spending (in 2016 dollars) is $414k; if health care spend increases 3% greater than overall inflation (quite likely), that number would be $2.3 million. Much of the arm wrestling in the market today is over who will manage that spend on behalf of patients/members/consumers. Through that lens, Amazon’s desire to determine how those dollars are spent is quite obvious. Given all of its assets — purchase and behavior data, sensors, analytics, cloud infrastructure, etc. — Amazon’s understanding of each of us is unrivaled. The company’s ability to engage, activate, communicate, inform, incentivize, and provide products and services is staggering. Amazon’s potential to change behaviors, overtly and subtly, is enormous. It is not hard to see this collection of assets being a platform for a risk-based, value-based care model at some point. Amazon Health Insurance?

So, what can go wrong? Plenty. First, health care is hard and expensive. One can easily envision consumers being anxious with the aggregation of all these data within one entity. Notwithstanding the guardrails provided by HIPAA, Amazon has raised numerous privacy concerns in the past. Just last week it was revealed that Amazon shared Ring doorbell surveillance data to eleven law enforcement agencies without prior consent. That same day Amazon offered concessions to European Union regulators in an antitrust case alleging that the company was using non-public information from retailers on the platform to compete against them.

One dimension not getting as much attention in all of the excitement with this transaction is the specifics of the deal. Clearly, as the economy has turned, valuations have been compressed over the last six months. While the $18 per share price is a ~75% premium to the prior day share price, it is nearly 40% below the 52-week high of $30.18 per share and well below the all-time high of ~$60 per share hit in February 2021 when ONEM’s market value was approximately $12 billion. Analysts peg the purchase price to be 3.6x and 2.8x 2022 and 2023 projected revenues, respectively. Pretty sobering multiples given the investor euphoria of the last two years.

Notwithstanding that this transaction may fundamentally reset valuation multiples, this likely will trigger a wave of additional M&A activity, particularly among smaller private health care companies. As liquidity is leaving the system making follow-on financings harder and more expensive, many companies will simply choose to merge or sell. And as is so often the case, the premium multiple tends to go to the companies that transact early in the correction cycle.

Having said all that, this is terrifically validating for the thesis that technology will transform the business of health care. It is exciting to contemplate the potential role “Big Tech” can play in this sector. Over the last 24 months, there have been nearly 1,500 digital health financings; many of those companies have built interesting but narrow point solutions with arguably muted impacts on cost, quality, and outcomes. Amazon’s health care strategy points to the profound implications of a broader integrated consumer-centric model.

Interestingly, McKinsey’s “profit pool” analysis continues to rank the health care services and technology sector as one of the most attractive in all of health care. The firm estimated that this sector generated $50 billion of EBITDA in 2019 and that it will increase to $68 billion by 2025. Specifically, McKinsey argues that this 8.2% CAGR is powered by advances in data and analytics, as more effective population health management, revenue cycle management, patient engagement, and virtual care models proliferate. Through this lens, it certainly appears that Amazon is targeting a compelling entry point into health care.

The scale of Amazon is astounding. Last year the company generated $469.8 billion in revenues. It has over two million small and medium-sized businesses on the platform. Given concerns over regulatory exposure, the company recently took steps to reduce its private label operations, which while only about 1% of total sales, includes a staggering 243,000 SKUs across 45 house brands. Here’s to hoping that the ONEM members do not get lost in this maze and that Amazon can actually have a meaningful impact on their well-being.