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CVS Will Buy Target's 1,600 Pharmacies, Clinics For $1.9B

June 19, 2015

CVS Health (CVS) said today it would buy the pharmacy and clinic business of retail giant Target (TGT) for $1.9 billion in a bold move to expand the CVS brand across the country.

CVS will extend its reach into Targets via a "store-within-a-store" format, rebranding Target's more than 1,660 pharmacies. In addition, Target's nearly 80 retail clinics staffed by nurse practitioners and other providers will be rebranded under CVS' MinuteClinic name.

If CVS completes the transation, it will be the largest retail pharmacy chain in the U.S. CVS now operates 7,800 retail drugstores while Walgreens Boots Alliance (WBA) has more than 8,200 drugstores.

The deal comes as the Affordable Care Act and changes in how private insurers and employers pay for health care puts pressure on medical care providers to control costs. This trend is escalating consolidation among drugstore chains and is certain to put pressure on smaller operators like Rite Aid (RAD) to sell to either Walgreens or CVS.

"This strategic relationship with Target supports the highly complementary customer base, brand and culture we share," said Larry Merlo, CVS Health's president and chief executive officer. "This relationship with Target will provide consumers with expanded options and access to our unique health care services that lead to better health outcomes and lower overall health care costs."

CVS said it will commit to putting even more clinics in Targets across the country, adding another 20 within three years. That, CVS said, is in keeping with CVS' national plan to operate 1,500 retail clinics by 2017 across the country at a time its chief rival, Walgreens Boots Alliance (WBA) has been opening up retail clinics at a much slower pace amid a restructuring of US operations.

CVS and Target said they plan to develop up to 10 "small, flexible format stores" within two years after the deal closes and brand each of those as "TargetExpress" with each including a CVS pharmacy.

The deal brings CVS into new potentially lucrative markets for its customers and employer clients when its brand is extended to Target stores in Seattle, Denver, Portland and Salt Lake City. "By partnering with CVS Health, we will offer our guests industry leading health care services, and at the same time, sharpen our focus on elevating the way we deliver wellness products and experiences to our guests," Target chief executive Brian Cornell said in a statement.

Under the ACA, payments are more based on quality and costs, moving health care payment away from the traditional fee-for-service approach, which leads to overtreatment, to value-based medicine. Pharmacies are more involved in coordinating care and have to keep a close eye on costs, urging use of cheaper generics while helping providers adhere to more effective and often less costly medicines.

Walgreens acting CEO Stefano Pessina recently said he expected the U.S. market to mirror Europe's where the government has more control over payments to medical care providers, including pharmacies.

"This market, the American market, is ready for another round of consolidation," Pessina, Walgreens Acting CEO and executive vice chairman, told analysts in April on Walgreens Boots Alliance second-quarter earnings call. "Because the margins are squeezed everywhere; the government is more and more in charge for the costs of the healthcare business and so for sure they will exercise their power to squeeze the cost as much as possible, as we have seen in Europe for decades."



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