CVS Health's Schnuck Pharmacy Buyout To Widen Specialty Arm

CVS Health (NYSE:CVS) has been expanding steadily on an inorganic basis. Following the company’s partnership deals in kidney care market earlier this month, its subsidiary, CVS Pharmacy, Inc. has entered into a definitive acquisition agreement to expand in the growing field of specialty pharmacy.

Per the agreement, the company will acquire the retail and specialty pharmacy businesses of Schnuck Markets Inc., a third-generation, family-owned grocery and pharmacy retailer. Under the terms of the deal, CVS Pharmacy along with its subsidiaries will acquire and operate 99 pharmacy locations of Schnuck pharmacies and will rebrand them as CVS Pharmacy. Further, the company will also acquire the prescription files from 11 Schnucks pharmacies and transfer them to nearby CVS Pharmacy locations.

Financial terms of the deal, however, have been kept under wrap.The deal is expected to be completed by the end of second-quarter 2020, subject to customary closing conditions.

How Far is the Deal Strategic?

Schnuck’s pharmacy network is spread across Missouri, Illinois, Indiana, Wisconsin and Iowa. Post integration, CVS Health will leverage on this widespread network to strengthen its foothold in the Midwest region of the United States. This deal also remains in line with CVS Health's strategic priority to ‘Be Local’. With the acquisition, CVS Health will be able to open its Pharmacy locations within Schnucks stores, thereby increasing access to customers.

Further, the company believes that CVS Pharmacy's advanced pharmacy services and clinical skill will improve health outcome for Schnucks customers. This acquisition will also provide CVS Health with a capital-efficient way to expand into key areas.

Also, the acquisition aligns with CVS Health’s key strategy to exit tobacco. In this regard, the company was the first and only major retail pharmacy to bar tobacco from its business back in 2014. Notably, Schnucks stores became tobacco free from January 2020.

Specialty Pharmacy Industry Prospect and CVS Health

Going by a Pharmacy times data, since 2011, specialty spending has increased by 73% and specialty pharmacy is projected to grow to $500 billion by 2020.

With management emphasizing that CVS Health’s specialty business remains a top priority for its customers, we believe it is well positioned to tap this opportunity based on the broad, differentiated offerings.

Going forward, management expects drug price inflation, new product launch, higher utilization and new PBM clients to fuel growth. The acquisition of Schnuck pharmacies, post its completion, is expected to act as an added impetus to this business’ growth.

Share Price Performance

Over the past six months, CVS Health has outperformed its industry. The stock has lost 2%, narrower than the 6% decline of the industry.

Zacks Rank & Key Picks

CVS Health currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks from the broader medical space are ResMed Inc. (NYSE:RMD) , Medtronic plc (NYSE:MDT) and Hill-Rom Holdings, Inc. (NYSE:HRC) .

ResMed has a projected long-term earnings growth rate of 14.5%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Medtronic’s long-term earnings growth rate is estimated at 7.4%. The company presently carries a Zacks Rank #2.

Hill-Rom’s long-term earnings growth rate is estimated at 11.1%. It currently carries a Zacks Rank #2.

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