Cano Health directors resign over conflict with executive team

Cano Health shares plunged 22% Friday after three board directors resigned and called for CEO Dr. Marlow Hernandez to be removed.

Nearly two years after helping the Miami-based primary care provider go public through a special purpose acquisition company, Barry Sternlicht, a billionaire real estate investor who served as chairman of the board, announced he is resigning over differences with executive leadership. Two other directors, Dr. Lewis Gold, co-founder of Sheridan Healthcare, and Elliot Cooperstone, managing partner of InTandem Capital Partners, also resigned.

“It’s a corporate governance mess, and it’s clearly not going to play out well,” said Ari Gottlieb, a principal at A2 Strategy Group.

Cano Health defended its chief executive and said the directors departed over a short-term focus on investment returns. “We strongly disagree with their representations about the company and their assessment of Dr. Hernandez’s performance,” the company said in a news release Friday.

Cano faces major liquidity issues amid rapid growth. The company recorded a net loss of $428 million on $2.7 billion in revenue in 2022, partially due to a non-cash goodwill impairment, according to regulatory filings. Cano operates 172 medical centers in California, Florida, Illinois, Nevada, New Mexico, Texas, and Puerto Rico, and treats 310,000 patients, more than half of whom are Medicare enrollees covered under value-based arrangements.

Sternlicht and other investors provided the company with an excess $1.4 billion in capital in June 2021, driving up its valuation to $4.4 billion. Previously, Sternlicht lauded Hernandez’s background as a Cuban immigrant and his service to underserved communities. Sternlicht also said the company’s fast growth and presence in the Medicare Advantage market made it an attractive investment.

“I wanted to invest in something that wasn’t sensitive to economic cycle, that wasn’t impacted by rising interest rates and trade wars or currency crises—that could withstand an economic cycle,” he told CNBC in November 2020.

The company is now valued at $457.6 million, almost 90% below its worth in 2021. In announcing his resignation, Sternlicht said, “This management team has expended nearly all this cash and the company has not enjoyed any demonstrable improvement in its core profitability.” Cano Health shares closed on the New York Stock Exchange at 91¢ Friday, 94% below the all-time high of $16.01 on Feb. 8, 2021.

The responsibility for the business’s downfall is likely shared, Gottlieb said.

“The folks who are challenging the strategy, and who are now resigning from the board, were the ones who literally purchased this business for over 10 times what it’s worth today. And they were on the board during execution. That’s not to let off the hook the legacy Cano team that’s running this business because they clearly have struggled a lot,” Gottlieb said.

In the company’s year-end earnings call, Hernandez said Cano is dialing back an expansion and merging clinics to improve its financial footing. The company also cut staff, implemented tighter spending controls and negotiated better contracts with vendors, Hernandez said March 1. The actions will save the company $70 million this year, he said. A spokesperson denied an interview request.

This month, Cano borrowed $150 million and sold debt to raise capital as its funds dwindle. “This was a fire sale bailout,” Gottlieb said. The company is going to have to show meaningful progress and pull back on growth to stay floating, he said.

Humana and CVS Health were reportedly in a bidding war for Cano last year, but a transaction has yet to materialize. Humana holds right of first refusal. Neither company responded to requests for comment.

Fundraising and acquisition opportunities are likely to be more challenging for the Cano moving forward, Gottlieb said.

Cano’s problems are indicative of broader issues with technology-enabled primary care startups, Gottlieb said. Many face financial difficulties and are struggling to create sustainability, he said. “Capital-intensive, risk-bearing providers that are in hyper-growth mode—and nobody was in more hyper-growth mode than Cano—need to be able to fund that, and capital markets got much more challenging,” he said. “Quite frankly, investors started getting more skeptical.”

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