Cano Health CEO steps down as company strives to move forward from 'distraction' of internal boardroom drama

Marlow Hernandez, D.O., agreed to immediately step down as CEO of Cano Health, the company announced Friday, just a day after its annual shareholder meeting.

Hernandez, who held the CEO position since 2014, will continue to serve on the company's board.

Cano Health's chief strategy officer Mark Kent will step in as interim CEO while the company conducts an external search for a permanent successor.

The primary care company, which went public two years ago through a $4.4 billion special purpose acquisition company merger, has been mired in an internal boardroom drama. In a press release, the company said the executive leadership was intended to "advance execution of Cano Health's strategy for stockholder value creation."

"Over nearly 15 years, Dr. Hernandez has pursued a powerful mission to improve patient health by delivering high-quality primary care to predominantly underserved communities," said Solomon Trujillo, chairman of the board, in a statement "Guided by that mission, he established Cano Health as one of the only value-based care platforms in the United States capable of delivering superior health outcomes at scale. Now, at this critical inflection point in Cano Health's trajectory, we have concluded together that we need to identify the right individual to take Cano Health to the next level—a proven operator who, as CEO, can accelerate execution of the Company's value creation plan to drive sustainable profitable growth for our stockholders."

Cano Health's board of directors, working with Russell Reynolds' Board Advisory Group, also is working to refresh the board's membership over the next several months by adding new independent directors to "help optimize performance."

In March, Cano Health announced it took out a $150 million loan as its cash dwindles. Its losses grew to $60 million in the first quarter of the year.

As of March 31, 2023, the company's total liquidity was $152 million.

The company runs value-based primary care centers and provides support to other primary care practices treating senior patients. It operates 172 medical centers in 10 states and provides care to 388,000 members. Membership increased 44% from the first quarter of 2022. Cano Health's membership includes 207,000 Medicare-capitated members, up 29% from a year ago.

The company faces increasing pressure to improve its financial performance as three former directors set their sights set on a leadership overhaul and attempted a board shakeup.

"It is of the utmost importance to me that the company move forward, free of distractions, under the best possible CEO," Hernandez said in a statement. "Mr. Kent is a proven healthcare operator, and having seen the progress he has already driven, I have tremendous confidence that under his leadership the Company will continue to deliver the quality care our patients have come to expect and capitalize on the massive market opportunity for value-based care as the Board seeks the optimal permanent successor."

In March, three board directors at Cano Health including early investor Barry Sternlicht resigned in protest of the primary care company's management and were actively trying to oust Hernandez. The group of shareholders, who have a 36% stake in the company, sent an open letter outlining their resignation from the company's board, expressed concerns related to CEO conduct and governance issues, and called for urgent leadership and strategic changes.

Among their numerous concerns, the trio points out that Cano’s total shareholder returns are down 83% over the past 12 months and -92.5% since going public in 2021. The three former directors also claim that Cano has burned through all of the roughly $535 million of capital it had on its balance sheet when its de-SPAC transaction closed in June 2021. In addition, the company has burned through most of the approximately $1 billion of debt capital raised since then.

The three former directors asked shareholders to withhold support for two directors up for reelection as a way to "send the message that the status quo is no longer acceptable."

Independent proxy advisory firms Institutional Shareholder Services and Glass, Lewis & Co. recommended that Cano stockholders withhold support for the company’s two director candidates, according to a press release issued by the three ex-directors.

However, during Thursday's annual meeting, shareholders reelected directors Alan Muney, M.D., and Kim Rivera. Trujillo acknowledged in a post-meeting statement that there was a "significant withhold vote" for Muney and Rivera.

Sternlicht and the two other former directors, Elliot Cooperstone and Lewis Gold, M.D., said in a statement that more than 82% of shareholders withheld their vote rather than vote for Muney and Rivera. The three said the voting results represent "a clear and striking referendum on the failures of Cano’s leadership."

The trio, representing Cano's largest shareholders, issued a statement saying they welcome the leadership change at Cano with Hernandez' "long-overdue" resignation.

"We have viewed Mark Kent, who is a high-integrity leader with relevant healthcare experience, as an ideal replacement for Dr. Hernandez since he joined the company earlier this year. But Mr. Kent and his management team need a credible, confidence-inspiring Board behind them to initiate a lasting turnaround at Cano. The current Board, half of which is composed of two withhold directors and the beleaguered ex-CEO, is simply not equipped to effectively oversee Cano at this critical juncture," the three wrote.

Sternlicht, Cooperstone and Gold said they will continue to pursue change "through all available means until Dr. Marlow Hernandez, Sol Trujillo and other misaligned directors are no longer affiliated with the company."

Cano Health said it would file the voting results of the annual meeting with the Securities and Exchange Commission (SEC) on a Form 8-K as soon as they are available. As of Friday, no filing had been made.

In a statement, Trujillo said the company would not be distracted by Sternlicht, Cooperstone and Gold's "misrepresentations of events and self-serving agenda."

The leadership change seems to be a move by the board to appease at least one of the requests from the dissident shareholders, noted Ari Gottlieb, principal at A2 Strategy Corp.

During the same annual meeting, shareholders did not approve the company's reverse stock split amendment. Cano Health shares were trading at $1.25 on Friday but rose 16% up to $1.45 in after-hours trading.

"If the stock goes below $1 for an extended period of time, they may get delisted because they can't actually get it above $1 through a reverse split," Gottlieb noted.

The battle between company management and the ex-directors is a distraction when leadership needs to be focused on turning around Cano Health's financial performance.

The actions by the three ex-directors seem to be more focused on saving reputation rather than saving the company, Gottlieb asserted.

Cano went public through a merger with the SPAC controlled by Sternlicht, and Jaws Acquisition Corp. paid $4.4 billion for the primary care company. 

In public statements, the three ex-directors cite "abysmal executive leadership" and "dismal board oversight and governance," but the SPAC had to approve Cano Health's board of directors when the acquisition deal went through, Gottlieb said, citing the proxy statement.

"Are they just trying to preserve their reputation for doing this deal? It feels personal," Gottlieb said.

During an investor call in 2019 announcing Jaws' SPAC deal with Cano Health, Sternlicht referred to Hernandez as a "super star in the healthcare industry" and called him the "Elon Musk of healthcare."

"At just 35, Marlow has a long runway ahead of him," Sternlicht said, according to a transcript of the call in an SEC filing.

"That's quite the change in opinion—from 'super star' to 'abysmal leader,'" Gottlieb wrote in a LinkedIn blog post about the Cano Health drama.

Going forward, there isn't an easy path forward for Cano Health to turn things around quickly other than selling the business, Gottlieb noted. Bloomberg reported in September that the company was exploring options including a sale. CVS Health was reportedly among several potential buyers weighing bids for the Miami-based company, but the retail pharmacy giant backed out of acquisition talks.

Cano Health now plans to sell certain non-core assets to narrow its operating focus to its Medicare Advantage provider division.