CVS Health Corp (NYSE:CVS) shook up the healthcare industry after announcing that it will acquire big-box retailer Target Corporation (NYSE:TGT)’s pharmacy and clinic business for $1.9 billion. There are more than 1,660 Target pharmacies in nearly every state in the US (47 states total) that will be rebranded as CVS/pharmacy. Target’s clinics, — about 80 in total — will be renamed “MinuteClinic”.
“This long-term strategic relationship will certainly benefit the patients, the employees and the shareholders of both companies,” CVS Health CEO Larry Merlo said in a conference call.
According to Target, its pharmacy business has about $4 billion annual sales. CVS said it would increase its debt load to do the deal and agreed to begin cutting its debt over time. So, with such a landmark deal in the works, the healthcare industry shakeup from a provider stance has begun and the markets are buzzing with “what’s next” for the acquisition trail.
But why pharmacies? This year has been ripe with growth from this space. Large giants like Wallgreens Boots Alliance Inc. (NASDAQ:WBA) and Rite Aid Corporation (NYSE:RAD) have seen considerable growth during the first quarter of 2015. For the latest quarter ending February 2015, Rite-Aid outdid analysts’ expectations for both earnings and revenues. The fourth quarter of fiscal year 2015 saw adjusted earnings come in at $0.12 apiece, ahead of analysts’ estimates, by 55.84%. Rite Aid acquired EnvisionRx, a leading pharmacy benefit management company,
Much of the recent attention on Rite Aid has been accredited to rumors that the Wallgreens giant would acquire it. The largest pharmacy retail chain in the world, Walgreens has been on a massive spending spree lately. It just concluded 2014 with complete acquisition of Alliance Boots GmbH, a leading European drugstore chain. But it may not just be limited to the “big box” pharmacy companies either. Many small companies have also seen success within the space as the healthcare industry continues to flourish. Take PharmCo RX and Parent Company, Progressive Care Inc. (OTCMKTS:RXMD), which not only eliminated over $1million in debt from its books but also reported record setting annual revenues for 2014 of $11million. This year also has begun to look more favorable after the company reported first quarter 2015 revenue of $3million.
The territory that PharmCo operates is in South Florida servicing Miami-Dade, Broward, Palm Beach, Martin, and St. Lucie Counties. The company fills over 14,000 prescriptions per month and at the current rate of operation, Progressive is on pace to surpass the milestone results it had delivered in 2014. With the company setting a goal of merging, acquiring, or aligning itself with other pharmacies, Progressive has zeroed in on building out economies of scale.
“This year we are on pace to do over $1 million in revenues per month. As the year progresses we expect to accelerate our growth as our marketing efforts yield more results. The company is close to reaching operating profitability and has reduced its debt by over $0.5 million. The short and long term stability of the company has greatly improved, and we believe our shareholders will see the benefits from these results,” stated Shital Parikh Mars, COO in a recent press release. With a stock price of less than $1, this may be a potential candidate for an acquisition especially as the healthcare industry continues to strengthen.
The US spends 18% of gross domestic product (GDP) on healthcare, which is expected to continue growing. Nearly half of this spending is already covered by state, federal and local governments and assuming it continues to rise at historical rates, governmental spending on healthcare should hit 34% of GDP by 2040. The aging population will be the source of up to 25% of this rise, which bodes well for sales in the sector evidenced by the growth already being seen from CVS, Walgreens, and Rite Aids 5-7% per quarter and even by smaller and more potentially undervalued companies like Progressive care who’s already shown 17% quarterly growth in 2015. These numbers set the tone for the industry to garner considerable growth for the foreseeable future.