The CVS-Target Deal: A Prescription For Profits

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There's not yet a pill for every disease under the sun -- contract ebola and you're still out of luck -- but the race to control as much of the quarter-trillion-dollar US pharmaceutical market in the United States has made the biggest hitters on the market try their best.  CVS Health, the 41st largest corporation on planet Earth, has taken a massive step towards the top by committing just under two billion dollars to the purchase of Target Pharmaceuticals.  The two companies have been flirting for a few weeks but inked the decision on Monday and made the deal final, transferring some 1600 pharmacies in 47 states with the hope that the retail giant will be able to shuck overhead while the pharmacy giant picks up a slew of new customers.  How will the move play out for each company on the market?

A Busy Year

In many ways, CVS has come rather late to the bargaining table.  A number of their competitors kicked off the New Year back in January by buying, selling, or merging together their operations with a number of new partners.  Johnson and Johnson made one of the biggest headlines in 2015 by snapping up a Swiss biotech start-up named AC Immune, whose work on Alzheimer's medication stands to benefit the 700,000 Americans living with the disease, for a price tag of just half a billion dollars.  Just two days later, however, the Irish pharmaceutical provider Shire decided to up the stakes considerably with a five billion dollar takeover of New Jersey-based NPS Pharmaceuticals.  The amount of activity by their competitors may have spurred CVS to action, or perhaps the company's own lukewarm performance gave management the green light for a shakeup.  CVS stock (CVS on the NYSE, trading for $102.44 a share) has had a middling year through 2015 to date, gaining only five percent overall after surging upwards by 30% in 2014.  CVS' performance doesn't signal danger, not when they control a larger share of the special prescription drug trade than any other company in the United States -- at 22.7%, they lead second-place MedCo Health Solutions by three full percentage points.  The company operates over 750 stores across the country and maintains a market cap of $114 billion.  What makes the Target deal so appealing to their bottom line?

Targeting A Deal

Much like CVS, Target stock (TGT on the NYSE, trading for $80.20 a share) had a great 2014 and has thus far followed it up with a rather pedestrian 2014.  Their holiday season of 2014 proved one of the best in company history, taking in no less than 46% more revenue than the year prior to finish out the year with almost half a billion dollars in sales.  The company announced grand plans to expand a chain of new shops in Canada after first branching up north in 2013, but publicity hasn't helped their needle move upwards with any consistency since the end of March.  Come April of this year, Target stock took a dive after an announcement that the company would have to cut several thousand jobs across the country, a story followed up weeks later with the deliciously ironic announcement that they would cut ties with the HR firm that did the firing.  Target's line of MinuteClinics, with over eight hundred in existing stores, faced redundancy with the launch of eighty Target Clinics in reluctant east coasts states like Rhode Island and Massachusetts, where a decade of lobbying by physician groups had kept the pharmaceutical trade out of big box stores.  Up until the day of the sale, Target owned as many retail store clinics as the entirety of its competitors combined (Wal-Mart and Kroger have only about 100 each).  Now, it appears the only question left is who will come out ahead of the deal.

Factors Favoring CVS

CVS needs new sales and new prescriptions in order to maintain a customer base that's increasingly turning to online pharmacies to deliver drugs.  Despite the USDA's frequent reminder that digital pharmacies come riddled with fraud and questionable legal practices, the BBC estimates that about the digital market share for pharmaceuticals stands at around four and a half billion dollars.  CVS plans to expand to 1500 clinics in the United States within the next two years: the Target deal gives them inroads to western states where they had previously been reluctant to invest in expansion.  They come out as the pre-emptive winner of the deal by virtue of snapping up a major piece of the market for just a quarter of their overall cash flow.

Factors Favoring Target

A cash holdout to the holiday season, when Target and every other retailer will get into the black, may be all it takes for Target to turn their year around.  At a time when they badly needed to cut their overhead, CVS offers them a fantastic amount of cash for the privilege.  Retail sales rise in the second half of the year, giving Target the badly-needed liquidity necessary to compete.  While Target's stock may rise with news of the sale, it's important to remember that the true test will be their performance during the months of November and December.

Conclusion: Buying and Selling

Any investor should hold stock in major retail companies like Target and major pharmaceutical distributors like CVS; given their steady gain and massive customer base there's little reason not to expect good value over the long term.  In the short term, however, CVS represents a fantastic opportunity for growth, especially as their stock has been in a mini-slump for most of the year.  CVS walks away with the better deal, having answered perhaps the largest question about the company's capability for growth, and should be an as-soon-as-possible buy for an investor looking for growth stocks in the near future, whether to sell off for gain or to hold on for a longer period of gains.

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