Target's exit comes as the pharmacy business becomes more rough and tumble

Running pharmacies is more difficult than it was a few years ago, and it's only getting tougher.

The growing complexity and expense in operating a retail drug-dispensary explains in large part why Target is selling its 1,660 pharmacies in 47 states to CVS Health Corp., even though the retailer counts on the pharmacies to help drive traffic to its stores. Target pharmacies will be rebranded and run as "store-within-a-store" CVS pharmacies under the $1.9 billion deal.

"There is a huge bundle of things that a pharmacy has to do to stay successful, and the overhead to do that is pretty substantial. And so I think Target is realizing, they just don't have the chops, nor the focus, to be as successful as they could be in the pharmacy business by owning it and running it themselves," said Brian Bullock, CEO of the Burchfield Group, a St. Paul pharmacy consulting firm.

Meanwhile, the quick access to high-visibility retail space was enough to induce CVS to announce an ambitious acquisition less than four weeks after it rolled out a $12.9 billion proposal to acquire the long-term-care pharmacy company Omnicare.

"I think the timing and the size of the deal was a bit of a surprise, but sometimes these things are driven opportunistically based on what assets are available," said Adam Fein, president of Pembroke Consulting in Philadelphia.

Antitrust regulators will have to approve the deal for Target to sell its pharmacies to CVS, which has its headquarters in Rhode Island. Though it's not clear when the deal will close, CVS agreed to pay a $150 million termination fee if the deal is canceled because of a failure to get regulatory approval before September 2016.

CVS already runs about 7,800 retail pharmacies in 44 states plus Puerto Rico and Brazil, with prescription drugs providing about 70 percent of the revenue to its retail stores, according to securities filings.

Target's decision to get out of the business of running pharmacies comes amid two broader trends: the competitive pressures in the pharmaceutical industry are ratcheting up at the same time that Target is working to refocus its business operations.

To succeed in selling drugs, pharmacies have had to figure out how to drive large-scale discounts for the generic drugs that make up more than 80 percent of all prescriptions filled, while gearing up to meet the needs for so-called "specialty pharmacy" drugs, more expensive medications proscribed for rare or chronic diseases.

For its specialty-drug business, Target would likely have had to buy a specialty pharmacy company to stay competitive, as supermarket chain Kroger did in 2012 and grocer Hy-Vee did last year.

On the generic-drug side, Target consumers will now be included among the customers of Massachusetts-based Red Oak Sourcing, a 50-50 joint venture that CVS runs with health care supplier Cardinal Health of Ohio. Red Oak says it is the nation's largest source of generic drugs, and it is less than a year old.

"Target realized they are not going to have the generic scale or the specialty expertise to win in the pharmacy industry," Fein said.

The expansion of insurance coverage spurred by the Affordable Care Act has come with questions about whether the United States has enough doctors to meet future need. One response has been the establishment of retail clinics that can address minor and routine problems faster and less expensively than hospitals or doctors' offices.

CVS runs 971 walk-in MinuteClinics for minor health care needs, and executives have announced plans to have 1,500 such locations within two years. Target's 80 existing health care clinics will be rebranded as CVS MinuteClinics, and CVS will open at least 20 more in Target stores within three years.

"We are seeing a rise of health care consumerism, what we have been calling this 'retail-ization' of health care," CVS CEO Larry Merlo told investors in a conference call Monday morning. "Consumer choice and accountability are growing."

Joe Carlson • 612-673-4779

Twitter: @_JoeCarlson