Acquisition Of Navarro To Expand CVS’ Hispanic Customer Base & Specialty Drugs Share

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CVS Caremark (NYSE:CVS) completed its purchase of Miami-based Navarro Discount Pharmacy, the largest Hispanic-owned drugstore chain in the U.S., last week. CVS announced its decision to acquire Navarro in July this year but did not disclose the financial details of the deal. The acquisition includes Navarro’s 33 retail drugstore locations as well as Navarro Health Services, a specialty pharmacy serving patients with complex or chronic diseases. The retail drugstores will retain the Navarro Discount Pharmacy name.

The acquisition will help CVS strengthen its standing in the Hispanic community and expand its share in specialty drugs.

Our price estimate of $77 for CVS Caremark is slightly lower than the current market price.

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Hispanics Are An Important Segment Of The U.S. Population

Navarro caters to Hispanic and ethnic marketplaces, and offers many products and services that are not found in traditional drugstores, such as wireless phones, designer fragrances and over-the-counter drugs and vitamins. It has annual sales of $340 million. According to the U.S. Census Bureau, Hispanics made up 17% of the U.S. population last year with 53 million people and accounted for more than half the overall U.S. population growth last decade. [1] By acquiring Navarro, CVS hopes to better cater to this growing section of the society.

We expect CVS Caremark’s share of retail prescriptions filled in US to reach 25% over our forecast period.

Expanding Share In Specialty Drugs To Drive Growth In CVS’ PBM Business

Within its pharmacy service management business, specialty drugs are one of CVS Caremark’s top priorities and the company is increasing its focus on developing this business. Specialty drugs treat complex diseases such as multiple sclerosis, rheumatoid arthritis, hepatitis C and cancer, among others. CVS operates approximately 30 retail specialty pharmacy stores (under the CarePlusCVS/pharmacy name) and 12 specialty mail order pharmacies located in 22 states in the U.S., Puerto Rico and the District of Columbia. The company has an approximate 15% market share in specialty drugs.

At present 60% of specialty revenues in CVS’ PBM segment are dispensed through specialty pharmacies. Specialty revenue grew 34% and 35%  year over year in Q1 2014 and Q2 2014 respectively. A new report released by CVS in November 2013 projects that specialty drug spending will more than quadruple by 2020, crossing $400 billion a year. Among CVS’ clients, specialty now represents about 22.5% of total drug spending and the company projects the same to grow to as much as 50% by 2018. [2]

CVS is optimistic that it can continue to gain specialty pharmacy share, as it focuses on developing innovative offerings that capitalize on the company’s unique ability to optimize cost, quality and access. The addition of Navarro Health Services, a specialty pharmacy serving patients with complex or chronic diseases, further expands CVS’ specialty drugs portfolio.

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Notes:
  1. CVS aims at Hispanic, specialty pharmacy markets in latest deal, Fortune, July 14, 2014 []
  2. CVS Caremark’s CEO Discusses Q1 2014 Results – Earnings Call Transcript, Seeking Alpha, May 2, 2014 []