A Strategic Look at CVS/TGT; Why We’re Still Bullish on RAD

Richard

CVS’ acquisition of TGT’s pharmacies raises from 17.6% to 22.7% the percent of the US population living in areas where CVS cannot be excluded from a retail pharmacy network (at least one that complies with commonly-used proximity standards). And, the transaction also takes a major mass merchant out of the business of operating retail pharmacies

Both accomplishments are crucially important. CVS has reduced its exposure to markets in which it can be excluded from narrow networks, and eliminated a major competitor who likely would have priced aggressively as retail networks narrowed

This is a very clever strategy – but to work it must be pressed much further. Before the TGT transaction, persons living within a commutable radius of a CVS store could choose from an average of 9.2 supermarkets or mass merchants who operated pharmacies in that same radius – now the number is down to 7.9 – still a very large number. The average distance from a CVS outlet to a competing mass merchant or supermarket with a pharmacy was 1.9 miles, now it’s 2.0

Because of FTC/DOJ limits on pharmacy market share (generally 35%), CVS cannot acquire control of enough supermarket and/or mass merchant pharmacies to eliminate these outlets as a major source of pricing pressure. WBA also would need to get into the act, and potentially RAD as well (note that the effect of eliminating TGT as a pricing competitor benefits WBA and RAD just as much as CVS)

We can’t rule out that CVS and WBA will methodically seek control of the pharmacies that currently exist within supermarkets and mass merchants, and that they’ll pursue this strategy instead of acquiring RAD. If they do, RAD shareholders never benefit from an acquisition premium; however RAD shareholders would benefit (arguably as much as CVS and WBA) from the reduced presence of supermarkets and mass merchants – still a bullish outcome, just not so bullish as an outright acquisition

For our full research notes, please visit our published research site

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