Target Corporation (NYSE:TGT) will hand over more all its pharmacy stores to CVS Health Corp (NYSE:CVS) according to their acquisition deal.
The announcement comes shortly after CVS Health recently acquired a pharmacy service provider known as Omnicare to strengthen its presence in the pharmacy business. The company purchased more than 1,600 target stores as well as 80 medical clinics.
Apart from increasing its presence in the prescription based market in the United States, there will be extra added benefits from the move. The company will be able to lower its drug cost and will thus achieve better EBITDA margins.
Other the past few years the pharmaceutical industry has been adapting to changing environments. Mergers and acquisitions have been at the center of these changes, and drug store chains have not been left behind. CVS is not following the conventional path that its competitors have been employing.
CVS will give Target $1.9 billion in exchange of the pharmacies and clinics. The clinics will notably be part of Target, but their operations will be in the hands of CVS. The agreement might seem rather unconventional, but both firms will benefit from it.
The pharmacy business has not been so profitable for target compared to its other departments. Its small size plus the increasing competition are some of the limiting factors. Letting go of the pharmacy business is, therefore, one of the best ideas for the company.
The acquisition will allow CVS Health Corp (NYSE:CVS) to expand into a larger network, and that will translate into higher prescription sales. The company had 7,800 stores by the end of the last quarter of 2014, thus coming in a few numbers shy of its competitor, Walgreens. The new deal will boost CVS’s total store count to 9,500, thus giving it a stronger competitive edge. CVS is expected to make a significant impact on Health Care expenditures. It will also allow the company to adapt better to requirements of the new Health Care Act popularly known as Obamacare.