CVS Hits Its Target With Pharmacy Deal

Things are stirring up at a pharmacy near you.

CVS Health (NYSE:CVS) and Target  (NYSE:TGT) announced today they have entered into a definitive agreement for CVS to acquire Target's pharmacy and clinic businesses for about $1.9 billion.

“We think that the acquisition of the Target stores makes strategic sense for CVS, notes Steven Halper, an analyst at FBR Capital Markets. “It adds another channel (mass merchandise) and it will seek to bring more of its services to Target customers.”

Carmen A. Catizone, Executive Director from the National Association of Boards of Pharmacy believes “this deal shows that CVS has changed their position and has become more aggressive."

As a part of the deal, CVS will acquire Target's more than 1,660 pharmacies across 47 states and operate them through a store-within-a-store format, branded as CVS/pharmacy. A CVS/pharmacy will also be included in all new Target stores that offer pharmacy services.

In a note, J.P. Morgan analyst Lisa Gill said she “views the deal positively for CVS, as it provides patients with additional points of access to CVS’s unique products and services, including certain key markets where CVS is currently underpenetrated, including Seattle, Denver, Portland and Salt Lake City. She keeps her overweight rating on the stock.

In addition, Target's nearly 80 clinic locations will be rebranded as MinuteClinic, and CVS will open up to 20 new clinics in Target stores within three years of the close of the transaction. The new clinics will be part of CVS/minute clinic's plan to operate 1,500 clinics by 2017.

CVS and Target also plan to develop five to 10 small, flexible format stores over a two-year period following the deal close, which will each be branded as TargetExpress and include a CVS/pharmacy.

In terms of the costs, Halper said: “The combination with Target pharmacy will give slightly more negotiating scale to purchase products. Some of that savings will flow down to the customer level in the form of lower drug costs (direct or through lower pharmacy benefit costs).”

So what does this mean for CVS’ biggest rival Walgreen Boots Alliance (NYSE:WBA); will this acquisition impact this other major pharmacy provider, if at all?

Regarding Walgreens, Halper said “it adds slightly to CVS share of the prescription drug market.” But he believes “Walgreens is more focused on driving same store sales at existing stores rather than adding significantly more stores. It’s major initiative is based on increasing front store sales (i.e. beauty category) rather than driving pharmacy sales.”

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Catizone noted that “Walgreens built up its whole network, and now CVS trying to build up its clinics, to exceed what Walgreens has done.”

“Both companies see the importance of the specialty pharmacy business and are looking for new markets to position them in those spaces; who becomes the leader will become more evident down the road,” he noted.

Target shares traded up around 1.6% to about $80.73 and CVS shares traded up about 0.9% to around $103.15, while Walgreen shares were down about 1% to around $84.31.