Cano Health separates chairman, CEO roles as former directors push for leadership overhaul

UPDATED: April 17 at 10:30 a.m. ET

Cano Health has separated the roles of chairman and chief executive officer in a move to change up its leadership structure as the primary care company is mired in an internal boardroom drama.

The company's stock jumped 12% Monday morning.

In a Monday letter to shareholders, the company said the move is intended to enhance Cano Health's governance structure and enable CEO Dr. Marlow Hernandez to focus his full attention on executing the company's operating plan.

"The promise of Cano Health to reshape healthcare with better outcomes at lower costs is more powerful and timely than ever. Our Board and management team are committed to long-term shareholder value creation by capitalizing on the strong foundation we have built and the tremendous opportunities in front of us,” Trujillo said in a statement. “To that end, we are intently focused on implementing decisive actions to successfully improve the company’s free cash flow and deliver greater value to our stakeholders. The Board determined that separating the roles of Chairman and CEO at this pivotal time for Cano Health will enable our CEO, Dr. Marlow Hernandez, to focus his full attention on executing our operating plan, while enhancing the company’s governance structure and Board oversight.”

Hernandez will continue in his role as chief executive officer, while Solomon Trujillo has been appointed as the non-executive chairman of the company's board of directors, Cano Health announced. Trujillo previously served as the chief executive officer for three companies and has more than 40 years of experience sitting on boards of directors at global companies, including PepsiCo, Bank of America and Target.

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

The change in leadership structure comes a week after a group of shareholders with 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.

In March, three board directors at Cano Health including early investor Barry Sternlicht resigned in protest of the primary care company's management. Billionaire board member Sternlicht resigned over differences with the company’s management team and chief executive. 

The three former directors then signaled they intend to form a group to "pursue changes" at the company which may include moves to oust the CEO and the sale of non-core assets. 

Today, the trio sent a new letter to the board demanding that it reopen the window for the nomination of director candidates and allow shareholders to vote on an alternative board.

Cano Health management said Monday in the letter to shareholders that the three ex-directors' comments about the company's leadership were "inaccurate, disruptive and misleading." 

"The directors who recently resigned from the Board have taken destructive actions that appear to be aimed at serving their own short-term interests at the expense of long-term value creation for all our shareholders," Cano Health said.

"The former directors are now selectively pointing to past decisions that they themselves architected, supported, and approved, in a manner that we believe is designed to serve their own personal agendas," Cano Health management said.

In a letter to shareholders issued April 10, Cooperstone, Gold and Sternlicht laid out their concerns and the "urgent need" for leadership and strategy changes.

"It is important to underscore that we are not 'activist investors', and we have no history of running public proxy contests. We have spent our careers establishing credibility across the financial markets and various corporate sectors, including healthcare services, based on our focus on the long-term," the three former directors wrote.

"Given our backgrounds, as well as our sizable investment, we hope it is clear that we are squarely aligned with all Cano shareholders," they wrote.

Among their numerous concerns, the trio point 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.

Cano Health management also had a misguided strategy to aggressively expanded to many other states and business lines, they wrote to shareholders.

Cooperstone, Gold and Sternlicht also allege "questionable conduct" by Hernandez related to share pledging and material loan transactions with Cano executives.

The three have made it clear that they want to oust Hernandez as CEO and overhaul the board membership and leadership. "We are prepared to engage with the Board on a logical refresh and submit candidates with experience in corporate governance, capital allocation, M&A, finance and audit matters, as well as the healthcare sector," they wrote to shareholders.

In its letter to shareholders, Cano Health management said the company is taking "immediate action" to improve its financial performance. Those steps include filling the company's existing medical center capacity, improving patient engagement to drive stronger financial performance, taking steps to accelerate free cash flow generation and improve liquidity, the potential sale of assets.

"We are by no means satisfied with our recent stock price performance, but with unanimous alignment at the Board level, we are taking immediate action intended to realize the intrinsic value of our model by driving greater efficiency, productivity, and sustainable profitability," management said in the letter.

UPDATED: March 4, 9 a.m. ET

Cano Health shares jumped more than 40% Monday after three former directors signaled they intend to form a group to "pursue changes" at the company which may include moves to oust the CEO and the sale of non-core assets. 

Cano Health's stock has plummeted 80% over the past 12 months.

Early investor and former board director Barry Sternlicht disclosed in a 13-D filing with the Securities and Exchange Commission (SEC) that he and two other former directors Elliot Cooperstone and Dr. Lewis Gold and "certain of their affiliates" entered into the group agreement pursuant to which they agreed to "act together to pursue change" to enhance shareholder value.

In the filing, the group disclosed that their aggregate voting power is approximately 36%.

Investors must file a Schedule 13-D form with the SEC when a person or group acquires more than 5% of a voting class of a company's equity shares.

In a filing with the SEC on Friday, Sternlicht said he may "consider, explore or develop plans or make proposals, whether preliminary or final," with respect to the company's performance, operations, management, governance (including potential changes to the Board), conflicted party transactions, capital allocation policies and strategy and plans of the company, including a potential strategic review or sale process involving Cano Health or certain businesses or assets.  

Cooperstone is the founder and managing partner of InTandem Capital, a private equity firm that has invested in Cano Health since 2016. He was previously CEO of Prodigy Health Group, a health plan services company acquired in 2011 by Aetna.

Gold is co-founder and chairman of the board at Advanced Recovery Systems, an integrated behavioral health company specializing in the treatment of substance abuse, eating disorders and associated mental health issues. He also serves as non-executive chairman of Urology Management Associates and Siromed. Previously, he co-founded Sheridan Healthcare in 1994 and served as its executive vice chairman and on its board of directors. 

Cano Health stock hits record low after 3 directors resign amid concerns over CEO's leadership

Cano Health shares tumbled 20% Friday to below $1 per share after three board directors including early investor Barry Sternlicht resigned in protest of the primary care company's management.

Billionaire board memberf Sternlicht resigned Friday over differences with the company’s management team and chief executive Marlow Hernandez. 

In a sharply worded letter to Hernandez and Cano Health board members, Sternlicht criticized the company's management and operating performance. Two other board directors, Lew Gold and Elliot Cooperstone, also resigned, the South Florida Business Journal reported.

"I remain extremely troubled by the poor operating decisions and performance, by what I consider the opacity and obfuscation of information furnished to the board, and by the inability to forecast the company's financial performance over which Marlow and his management team have presided," Sternlicht said in a public statement airing his concerns about the company's leadership.

Sternlicht said he raised his concerns to the board and Hernandez on numerous occasions but was largely ignored. 

The Miami-based company went public nearly two years ago through a merger with a blank-check company backed by Sternlicht in a deal worth $4.4 billion deal. Cano Health received approximately $1.49 billion of gross proceeds from the deal. That included approximately $800 million from private placement (PIPE) investors, including Sternlicht, a real estate investor, as well as blue chip investors and shareholders like Fidelity, Third Point, Maverick, BlackRock and Owl Creek.

Stenlicht said he invested $50 million of the $800 million PIPE. He noted the company's stock price has dropped over 90% from its debut, and Cano Health is now "saddled with a crippling debt burden."

In his letter to Hernandez and the board members, he said Cano Health's management team "has expended nearly all this cash" and the company "has not enjoyed any demonstrable improvement in its core profitability."

He also openly called for Hernandez to resign.

"To be crystal clear, I do not believe Marlow should remain the Chairman & CEO of the company. I believe that his continued tenure is harmful to the interests of stockholders and to Cano employees for all the reasons I have previously stated to you," he wrote in his statement.

Cano Health defended its chief executive in a statement issued in response Friday and also said the three directors are focused "solely on the short term."

"We strongly disagree with their representations about the company and their assessment of Dr. Hernandez's performance," the company said in its statement. "Our board and management team have devoted considerable time and resources to analyzing the Company's performance, operations, financial strength, and potential against the backdrop of the challenges the company and the sector have faced."

"While we fully recognize the recent disappointing share price performance, our work has supported our strong confidence in the company's mission and fundamentals, our commitment to driving operational and financial improvements, and our belief in the company's continuing prospects for long-term shareholder value creation," Cano Health management said.

The company also criticized Sternlicht's public remarks about his resignation as "reckless" and "irresponsible" because it undermines "healthy board debate and harms the company and shareholders."

"It is particularly concerning that Mr. Sternlicht decided to share his individual perspective on confidential Board deliberations and communications, which is misleading to shareholders and undermines the Board's ability to engage in the vigorous exchange of diverse views that is necessary for good governance," Cano Health management said. "Boards must have healthy debate about how best to drive shareholder value, including in difficult circumstances."

Sternlicht specifically mentioned Cano Health’s deal with Miami-based MSP Recovery, also known as LifeWallet. Cano Health assigned accounts receivable collections to the company, the South Florida Business Journal reported.

In December, Cano Health bought a medical group and management services organization in Florida for $31 million in equity and $1 million in cash. This follows other M&A deals in 2021. After going public, Cano Health bought Miami-based University Health Care for $600 million and Doctor’s Medical Center for $300 million.

The boardroom drama comes as primary care companies are ripe targets for acquisitions. Amazon, CVS and Walgreens have all made big plays recently to buy up Cano Health's competitors in the primary care space as a way to expand their reach into healthcare.

Amazon shelled out $3.9 billion for One Medical. Last year. Walgreens invested $5.2 billion in VillageMD to become a majority owner and then spent $9 billion to pick up medical practice Summit Health, the parent company of urgent care clinic chain CityMD.

Cano Health itself was reportedly an acquisition target. Last fall, there were media reports that the company was exploring options including a sale. CVS Health was reportedly among several potential buyers weighing bids for Cano Health, Bloomberg reported, citing people familiar with the matter. 

According to media reports, CVS Health backed out of talks about a potential deal.

The retail drugstore giant apparently turned its eye toward Oak Street Health, also a senior-focused medical clinic operator. CVS announced in February plans to buy the company for $10.6 billion.

Cano Health recently took out a $150 million loan as its cash continues to dwindle and its losses ballooned in 2022.

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 Florida, Texas, Nevada, Illinois, New Mexico, California and Puerto Rico. It opened 24 new medical centers in 2022 and added eight centers through acquisitions.

While the company has grown rapidly, it's also faced significant financial challenges. As of the end of December, Cano Health had $27 million in cash and cash equivalents, compared to $163 million at the end of 2021, according to the company's fourth-quarter and full-year earnings report released Wednesday.

For 2022, Cano Health saw its revenue rocket 70% to reach $2.7 billion compared to $1.6 billion in 2021. It reported a $428 million loss for the year. 

During its fourth-quarter earnings call in early March, Cano Health executives told investors that the company was hit with a noncash goodwill impairment of $323 million. Companies opt for impairment when the value of assets or goodwill on their books is no longer fully recoverable. During the call, executives didn't specify which assets the company had to write down as part of the $323 million impairment charge.

"Cano Health's board and management will continue to work closely together, with intensity, to improve operational execution, enhance cost discipline, and achieve positive free cash flow," the company said in its statement. "Cano Health has established a strong performance track record—providing patients improved access to care, lowering hospital admissions, and significantly reducing medical costs. This is where our focus will remain."