CVS buys out Target pharmacies. Prepares to move in on Target patients. What’s the long term outlook?

http://money.cnn.com/video/news/2015/06/15/target-selling-pharmacies-to-cvs.cnnmoney/
In a $1.9 Billion move, CVS buys out Target pharmacies in an effort to expand their reach. For those of you that don’t know, they also run the second largest pharmacy benefits manager (PBM) service, Caremark, and with their latest purchase of 1,600 Target pharmacies along with their 80 clinics, they will also be operating over 1,000 clinics under their Minute Clinic trademark. Sounds like just another acquisition by a Fortune 500 to get a little bigger market share? Maybe, maybe not.

It may seem natural for a retail pharmacy chain to acquire competitors, but this is the first move by a major retailer chain to buy out pharmacies belonging to a major corporation who’s major revenue comes from front store sales and not pharmacy. Previously, retail chains such as CVS and Walgreens would buy out large pharmacy chains or independents (think CVS’ acquisition of Long’s Drugs in CA and Walgreens purchase of Happy Harry’s in DE). This new purchase marks a first, and interesting prospect of partnership with other big name retailers.

This new partnership is mutually beneficial, with CVS gaining more prescriptions and patients from Target, and Target gaining a new customer base coming in from CVS. The question then is if CVS is aiming to push Walgreens out of retail pharmacy?

My opinion is that CVS understands their front store market is fading and trying to move into the healthcare side of their business model. Much like Walgreens’ new patient-centric focus, CVS may push their Minute Clinic and mail-to-retail model as their long-term outlook. The scary part is that it looks like they are moving towards a vertical integration business model. What’s vertical integration you might ask? In economics, vertical integration is where a supply chain of a company is solely owned and controlled by that company. Translated, this means CVS will be in full control of the patient interaction from a provider visit in their in-store Minute Clinic, to prescription fills within their pharmacy, to maintenance fills from their mail order pharmacy.

Great! That means I can see a doctor AND get my prescription all in one place, right?

Well yes, technically that would be true, BUT in the long run, it may potentially mean patients get locked into CVS exclusively. With greater control of the supply chain, CVS is in a position to negotiate a better contract with third-party-payers, or insurance companies. Ultimately, they may be able to create a new contract system that’s fully in-house, meaning that the only in-network or preferred providers are ALSO the only in-network or preferred pharmacies. This would be damaging not just to patients, but to the entire healthcare industry, as they are now able to undercut other pharmacies as well as provider offices. Suddenly patients may notice the primary doctor they’ve had for years is no longer a preferred provider, or is now out-of-network, meaning higher co-pays. Considering 75% of the entire U.S. population lives within a 3 mile radius of a CVS compared to a 5 mile radius for Walgreens, many insurance companies may prefer CVS as a provider and servicer for both medical AND prescription.

While there are still many regulatory and legal hurdles in place to prevent such an occurrence, if CVS is indeed planning such a strategy, we may be heading towards interesting times for the entire healthcare industry.

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CVS buys out Target pharmacies. Prepares to move in on Target patients. What’s the long term outlook?

2 thoughts on “CVS buys out Target pharmacies. Prepares to move in on Target patients. What’s the long term outlook?

  1. David Zhou says:

    Vertical integration isn’t new, but it maybe new to the drug/healthcare industry. Four example I know is PepsiCo, Boeing, General Motors, and Nucor. A few years ago, Pepsi tried to purchase its two largest bottlers and the Justice Department got interested due to potential monopoly issues. Boeing also bought a factory and a 50% stake in a joint venture that make parts for its 787 Dreamliner jet. In 2009, GM also took a minority stake in Delphi Automotive, GM’s biggest parts supplier. And lastly, Nucor (a steel manufacture) bought a major scrap-metal processor in order to consolidate its supply chain. The interesting thing is that all these companies are product oriented companies, they either make planes, bottles of drinks, cars, or steel. I consider the CVS to be more in the “service” industry, even though it sells drugs. So it is interesting to see a service producer trying to utilize vertical integration. On another thought, vertical integration is somewhat the opposite to specialization. Vertical integration is like jack of all trades but master of none and specialization is knowing a lot about very little. In medical fields, which is heavily concentrated in “specializations”, I wonder how vertical integration can be properly leveraged.

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    1. It will be interesting indeed to see how CVS will handle this or how the industry will respond to this. This may be a double edged sword on one hand with better contract negotiations with insurance companies yet on the other hand creating an even larger issue with healthcare accessibility. Only time will tell how this impacts the industry.

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