Primary care business Cano Health secures $150M loan as its losses swelled in 2022

Primary care company Cano Health has taken out a $150 million loan as its cash dwindles and its losses ballooned in 2022.

The company went public in 2020 through a SPAC deal backed by real estate investor Barry Sternlicht and runs value-based primary care centers and provides support to other primary care practices treating senior patients.

The company 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.

In its Q4 and full-year earnings report, Cano Health revealed a higher-than-estimated membership total of approximately 310,000 for the year, higher than the previous guidance of 300,000 to 305,000 members. Medicare capitated membership grew 42% to reach 180,000 members.

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.

While the company's revenue jumped 38% in Q4 to reach $680 million, its losses also grew to $302 million during the quarter. Executives told investors Wednesday the company was hit with a non-cash goodwill impairment of $323 million, which was partially offset by a gain of $81 million due to a fair value adjustment of warrant liabilities.

Companies opt for impairment when the value of assets or goodwill on their books is no longer fully recoverable. In 2021, after going public, Cano Health bought Miami-based University Health Care for $600 million and Doctor’s Medical Center for $300 million.

During the company's earnings call Wednesday, Cano Health Chief Financial Officer Brian Koppy didn't specify which assets the company had to write-down as part of the $323 million impairment charge.

"The way to think about it is, the test is a fair value test and is heavily determined by stock price. Our stock price, unfortunately, declined from September to December requiring an additional goodwill test to be performed at the end of the year. The $323 million just essentially represents the excess of that fair value, but it's really a broad book of the enterprise," he told investors.

In December, Cano Health bought a medical group and management services organization in Florida for $31 million in equity and $1 million in cash, Koppy said during the call. The deal adds about 7,400 Medicare Advantage members to the company's membership.

Shares at Cano Health sank 17% in post-market trading Wednesday, Seeking Alpha reported, as its 2023 outlook trailed analysts' expectations. The company is projecting 2023 revenue between $3.1 billion and $3.25 billion and membership by year-end in the range of 375,000 to 385,000.

The stock has dropped 69% in the past 52 weeks.

Cano Health also took a hit on the market back in October when its shares plunged 42% after media reports that CVS Health backed out of talks to potentially buy the primary care company.

In December, a key stockholder sold the remainder of its Cano Health shares. Third Point, operated by Daniel Loeb, sold its remaining stake in the company amid mounting concerns around the healthcare provider’s liquidity, Bloomberg Law reported, citing people with knowledge of the situation.

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, inclusive of the previously mentioned non-cash goodwill impairment of a loss of $323 million. In 2021, the company reported a loss of $116 million for the year.

Last week, the company announced it had secured a $150 million loan from Diameter Capital Partners LP and Rubicon Founders.

The transaction is notable for the lucrative terms for the investors.

The loan, which matures November 2027, initially bears 14% interest for the first two years and then will bear 13%, Cano said.

Ari Gottlieb, principal at A2 Strategy Corp., noted in a LinkedIn blog post that the transaction gives the investors immediately exercisable warrants (at one cent) worth over $50 million in current value (with upside) plus 14% in annual interest and a senior claim on Cano’s assets, valued at $4.4 billion at the time of the SPAC.

"It is easy to see a clear path to value for the lenders in a de-risked transaction, and how limited Cano’s other options were. Cano was in a dire financial position about to run out of cash with a depleted balance sheet from aggressive growth, forcing such an expensive deal," Gottlieb wrote.

Marlow Hernandez, M.D., co-founder, chairman and CEO of Cano Health, told investors during the company's earnings call Wednesday that the company's growth in 2022 "outstretched" its liquidity to support it.

Cano Health's rapid growth pressured revenue on a per-member basis, particularly in its Medicare Advantage business, Hernandez said. These financial challenges were compounded by the rapid rise in inflation and interest rates to increase expenses, he said.

"Consequently, lower-than-expected Medicare Advantage revenue negatively impacted our operating performance and our cash flow. And as a result, liquidity was not at the level needed to fund the growth we have planned for 2023 and we took decisive actions at the end of '22 and into '23 to continue to improve cash flow and liquidity," he said.

Diameter Capital Partners is an existing lender to Cano Health and sees the potential upside in continuing to invest in the business.

"Cano Health operates in one of the most exciting areas of healthcare services," Jonathan Lewinsohn and Scott Goodwin, co-founders and Managing Partners of Diameter Capital Partners said about the loan transaction. "We believe that the current capital infusion will help the Company realize its unique potential," they said.

The company plans to "dial back" the addition of new medical centers in 2023 which is expected to reduce cash use and capital expenditures by approximately $35 million, he said. 

Cano Health plans to add 13 medical centers this year and also merge eight centers with larger facilities to end the year with 177 centers. It is strategically focused on Florida and optimizing existing center capacity, executives said.

The company also has taken other actions to slash expenses and improve operational efficiencies, such as renegotiating contracts with payers, with the aim of generating $70 million in cost reductions in 2023, Hernandez said.

"Collectively, these initiatives put us on a path to meaningfully improved cash from operations as we move through this year and into 2024," he said.