Target to sell its drugstores to CVS for $1.9b

R.I. retail chain to buy 1,660 pharmacies; Move tied to shift in health care services

A Target store team member places an item back on the shelf near the pharmacy department at a Target store in Los Angeles.REUTERS

CVS Health Corp. has moved aggressively to expand its role as a Main Street provider of basic medical services with the $1.9 billion purchase of 1,660 pharmacies from the department store chain Target Corp.

The Woonsocket, R.I., retailer is trying to capitalize on shifts in the health care marketplace, including a shortage of primary care physicians and millions of new patients being covered under the federal Affordable Care Act. The additional pharmacies inside Target stores give it much greater reach.

“It’s an opportunity for CVS to differentiate themselves from simple pharmacy providers. This is a move toward building their presence in a way that helps them play a larger role in managing customer health,” said Robert S. Huckman, cochair of the Health Care Initiative at Harvard Business School.

“The opportunities to draw in customers of all types is significantly greater with a CVS pharmacy connected to Target superstore than if a CVS tried to build the whole thing themselves,” he added.

CVS already operates nearly 1,000 clinics in its stores in the United States where nurse practitioners and physician assistants offer a range of services, from administering vaccines and routine lab tests and diagnosing common illnesses. The retailer’s in-store clinics are seen as a lower-cost alternative with longer hours than most care facilities in the traditional health system.

The company hopes to expand its MinuteClinic count to 1,500 by 2017, starting with the nearly 80 clinics already inside Target stores. CVS said it has had 24 million patient visits to its clinics, while Target reported 435,000 patient visits annually.

All current and future pharmacies and clinics inside Target stores will be operated by CVS and carry its name.

The acquisition also gives CVS a retail presence in new markets, including Seattle, Denver, Portland, Ore., and Salt Lake City, and makes it the largest pharmacy chain in the United States.

The companies plan to open up to 10 smaller TargetExpress stores that will include a CVS pharmacy over the next two years.

The chief executive of CVS, Larry Merlo, said the Target deal “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.”

In the next five years, pharmacy and drugstore revenue in the United States is expected to grow to $303.3 billion, from $262.9 billion, according to an industry report from IBISWorld in New York.

“Groups like CVS are seeing this as a great market and a huge opportunity,” said Joseph W. Ferullo, an associate professor of pharmacy practice at the Massachusetts College of Pharmacy and Health Sciences.

“When patients are in your store, they also buy other products.”

With about 4,100 pharmacists filling some 96 million prescriptions, the Target drug business generated $4.2 billion in annual sales, according to the companies.

CVS, by contrast, operates 7,822 retail stores, and reported revenue of $139.4 billion in its last fiscal year, which also includes its business of managing prescription drug coverage for employee health plans and insurers.

CVS said it will finance the acquisition with debt.

The Target deal is the latest example of CVS’s pushing into the health care industry.

In May, the company acquired Omnicare Inc., a provider of pharmacy services, for $12.7 billion.

CVS said that buying Omnicare would allow it to expand its ability to dispense prescriptions in assisted living and long-term care facilities, and to expand its presence in the speciality pharmacy sector.

CVS stock closed at $102.58 Monday, up 36 cents from Friday’s close on the New York Stock Exchange, according to Bloomberg News.