CVS Health Corp (NYSE:CVS) saw its shares rally after announcing that the company would purchase Target’s (NYSE:TGT) pharmacy business for $1.9 billion. CVS is currently the second-largest drugstore chain in the United States, with 7,800 stores in operation. CVS saw its shares rise a half percent to $102.66 per share, while shares of Target rose 1.6 percent to $80.76 in morning trading.
The deal would give CVS more than 1,660 additional pharmacies and nearly 80 additional clinics across the United States. All of the new Target stores being built with pharmacies will include a CVS pharmacy. Target’s pharmacies and clinics generate about $4.2 billion in sales annually. CVS will also open up to 20 new clinics in Target stores within three years of the closing of the deal.
The deal would increase the bargaining power of CVS in its talks with pharmaceutical companies regarding drug prices. Over the past decade, prices for drugs have been climbing quickly, outpacing the rate of inflation by a considerable amount and resulting in more people having to choose between buying prescribed medications and buying food or paying bills. The increased clout of CVS may enable it to negotiate lower prices with pharmaceutical companies and pass those savings onto its customers.
The deal would also give CVS more retail clinics across the nation. Retail clinics are a fast-growing segment of the primary-care market, with costs that are about 33 percent lower than that of traditional outpatient visits. Many consumers have reported that they like the convenience, lower wait times, and the lower costs of the retail clinics, giving CVS an incentive to acquire as many retail clinics as they can.
CVS has also announced that it would reduce the funds for its 2015 share repurchase program by $1 billion. Now, the company is planning to buy back $5 billion in shares instead of the $6 billion previously planned. Target said it plans to use the expected $1.2 billion in after-tax proceed to boost its share repurchasing program, doubling the amount of the program to $10 billion last week.