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How CVS evolved from retail pharmacy into health care behemoth

A look at how CVS came to dominate the retail pharmacy industry

CVS Health Corporation (CVS) has emerged as a pioneer in the pharmaceutical industry in the 21st century.

With roughly 85% of Americans living within five miles of a CVS pharmacy, the company is the most profitable retail pharmacy in the U.S. While Rite Aid has a net worth of roughly $200 million and Walgreens is worth $30.52 billion, CVS's net worth is a whopping $104.57 billion as of March 3, 2023.

CVS came to dominate the retail pharmacy industry and beyond through ever-expanding operations fueled by acquisitions, mergers, and partnerships:

The first wave of acquisitions

The Consumer Value Store first began in 1963 as a health and beauty retailer in Lowell, Massachusetts, before changing its name to CVS in 1964.

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Pharmacies within CVS stores were introduced later in 1967, and two years later the company was sold to Melville Corporation.

By 1988, the chain grew to 750 stores with sales reaching roughly $1.2 billion. But it wasn't until 1994 that CVS's health care and pharmaceuticals became the primary sources of revenue.

That's when CVS introduced PharmaCare, a pharmacy benefit management company (PBM), which serves as the middleman between insurance companies and pharmaceutical manufacturers.

Subsequently, as the internet boom swept across the country, CVS capitalized on the opportunity by acquiring Soma.com for $30 million. Soma was one of the first big digital drugstore startups, and the acquisition helped put CVS on the map digitally, giving the company leverage to launch its own website.

"The Internet is a logical extension of our business strategy of making life easier for our customers," CEO Tom Ryan said at the time.

PBM domination

Fast forward to 2006, CVS acquired Caremark, a PBM, and merged the company's operations with PharmaCare. This eventually became CVS Caremark, which is now one of the three biggest PBMs in the prescription drug market that dominate market share. As of 2022, CVS Caremark led the way with 34% market share while Express Scripts accounted for 24% and Optum Rx accounted for 21%.

The Caremark deal was unique in that health insurers, rather than pharmaceutical retailers, are typically the ones who buy PBMs through a strategy known as vertical integration — that is, when a company acquires another company in the supply chain or industry and uses it to its advantage.

Also in 2006, CVS acquired MinuteClinic for $170 million. The company's annual revenue that year stood at $44 billion, with 70% coming from pharmacy sales alone. The business buoyed CVS during the Great Financial Crisis, and the company's stock continued to outperform the broader S&P 500 for years to come.

At the same time, CVS's dominance in the PBM space correlated with the demise of smaller, independent pharmacies through buyouts and bankruptcies.

As "middlemen," PBMs have the ability to influence or negotiate drug prices by working with pharmacies, health insurers, patients, manufacturers, and in some cases, the government.

This led to controversy due to the lack of price transparency and fee practices. The lack of price transparency raised alarms at the Federal Trade Commission (FTC), which intervened to investigate CVS Caremark and five other PBMs in June 2022.

The ongoing investigation, according to an FTC report, is intended to look into how PBMs steer insurance networks to their own pharmacies, move drug price tiers, manage rebate contracts with manufacturers, and overall how they make the pharmaceutical supply chain more favorable to them.

“Although many people have never heard of pharmacy benefit managers, these powerful middlemen have enormous influence over the U.S. prescription drug system,” FTC Chair Lina Khan said in a statement at the time. “This study will shine a light on these companies’ practices and their impact on pharmacies, payers, doctors, and patients.”

The PBM issue is also a driving force behind billionaire Mark Cuban's Cost Plus Drugs Company.

'Health care destination'

As CVS became one of the main leaders in both the retail pharmacy and PBM space, the company elected to venture even further into the health care industry.

In August 2018, the CVS MinuteClinic launched online services that could be accessed 24 hours a day, which increased market access and revenue for CVS. Virtual visits began at $59, along with an option of insurance coverage. A few months later, CVS officially acquired health insurance company Aetna.

"CVS Pharmacy is evolving from not just a store that happens to have a pharmacy and products into more of a health care destination," then-CVS CEO Larry Merlo said about the deal.

"The possibilities are incredible," SCAN Health Plan CEO Sachin Jain told Yahoo Finance Live recently (video above) when asked about CVS being more of than a pharmacy. "You have a company that owns an insurance arm. You also have a company that now owns a clinical care delivery arm as well as a retail pharmacy. And so, if you can make the pieces work together, it'll be great."

A woman walks past a CVS Pharmacy in Washington, DC, on November 2, 2022. (Photo by BRENDAN SMIALOWSKI/AFP via Getty Images)
A woman walks past a CVS Pharmacy in Washington, DC, on November 2, 2022. (Photo by BRENDAN SMIALOWSKI/AFP via Getty Images) (BRENDAN SMIALOWSKI via Getty Images)

Despite antitrust concerns over reduced competition in the market, the CVS-Aetna merger ultimately received the green light from the Department of Justice in September 2019.

The American Medical Association (AMA) opposed the arrangement, which entailed Aetna sending their patients directly to CVS, arguing that the "benefits were speculative, [and] it will likely have anti-competitive impacts in the PDP, health insurance, retail pharmacy, specialty pharmacy, and pharmacy benefit management markets." AMA also argued that it would raise health insurance premiums.

And with Amazon's recent $3.9 billion acquisition of One Medical, a primary care organization, retail's push into health care continues apace.

"These are potentially industry-transforming deals," Jain said. "I think people have longe hoped that retail plus health care could equal a better experience for patients. The cautionary tale is really about the very different cultures of retail and clinical service entities. And I think these deals could end up being highly transformative for health care, or they could go down as potentially the worst deals in the history of the health care industry."

'Publicly-traded entities don't necessarily understand clinical culture'

When the coronavirus pandemic swept through the U.S. in 2020, all of CVS's assets were put to the test.

In November 2021, CVS announced its plans to close 900 stores over a span of three years as the prospect of "a CVS next door" was replaced by Amazon (AMZN) goods at the doorstep.

Nevertheless, revenue remained steady for the company, enabling more acquisitions and partnerships.

CVS acquired Signify Health (SGFY) for $8 billion in 2022 and is in agreement to acquire Oak Street Health (OSH) for $10 billion at some point in 2023. Oak Street Health is a health care provider for older adults and promote its economics on "value-based care."

"These moves demonstrate the continued push by many high-profile pharmacies into fast-growing health care markets such as senior care, primary care, and home health," Scott Dunn, lead health care analyst at CB Insights, told Yahoo Finance.

At the same time, some experts wonder whether retail's reach into health care could go too far.

"I've just been around the block enough to know that oftentimes publicly-traded entities don't necessarily understand clinical culture," Jain said about the recent moves by Amazon and CVS. "They're making decisions for the short term. And when you're making decisions to hit a quarterly earnings target, you aren't necessarily doing the things that you need to do to improve people's health over the long term."

Anjalee Khemlani contributed to this report.

Tanya is a data reporter for Yahoo Finance. Follow her on Twitter. @tanyakaushal00.

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