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The share price of CVS Health Corporation (NYSE:CVS) was up by 0.53% to $103.12 today, one day after it announced that it was entering into a deal to acquire Target Corporations’ in-store clinic and pharmacy operations. Target shares (NYSE:TGT) were trading up by 0.65% today at $80.97. Target shares were off slightly after the announcement yesterday, so the increase today brought the share price above the $80.00 mark for the first time since Friday and only the third time during the month of June. CVS shares are now above $103.00 for the first time since 28 May, an amount that has been its high water mark for 2015. Both companies are trading in the vicinity of their 52-week and all-time highs, but much of the credit for that has to go to the general stock market trend (bubble) that investors have created.
A Possible Precursor
It was only last month (May 2015) that CVS acquired Omnicare (NYSE:OCR), a healthcare services provider focused on long-term care facilities. That deal was worth $10.1 billion. The price tag for the Target pharmacy operations pales by comparison at $1.9 billion.
With both acquisitions and Target’s pharmacy business described as “modestly negative,” there is reasonable speculation that CVS’ acquisitions may be a precursor of things to come as the healthcare industry is forced to redefine and reshape itself both to avoid penalties and remain or become profitable under the added regulatory burdens of Obamacare.
Smaller entities are going to be looking for a way out, especially through acquisition. CVS CEO Larry Merlo told those on a conference call that, “The healthcare industry is evolving rapidly. In this environment, success is all about effectively managing costs, quality and access.”
A Potential Powerhouse
Pharmacies are not a core part of Target’s business, which was originally clothing and household items, but has evolved more and more toward groceries over the past several years. Divesting its pharmacies is, almost without question, a good move, especially since they will continue to exist as a store-within-a-store under the ownership and control of CVS, the U.S.’ second-leading pharmacy and healthcare company.
The venture will be a boon to CVS, which currently has no location in major western U.S. cities like Seattle, Portland, Salt Lake and Denver, giving them almost instant access to those markets without having to spend a dime on brick and mortar. There will be trowels involved, however, as CVS and Target begin to roll out a number of TargetExpress locations, labelled as “small, flexible-format stores” that include CVS pharmacies. The plan also involves having a total of 100 CVS MinuteClinic operations in select Target locations.
The fact of the acquisition is, in and of itself, interesting. For investors, however, the thing that could matter most is being aware of the potential trend in this sector.
