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CVS-Aetna deal 'really smart' way to ward off Amazon encroachment, analyst says

Key Points
  • Needham upgrades shares of CVS to a buy rating and bumps its price target on the retail pharmacy, praising its proactive moves as e-commerce giant Amazon looms.
  • Amazon has been quietly exploring ways to expand into the pharmaceutical industry.
  • "Even in the face of an impending competitive entry in pharmacy by Amazon, we find the risk-reward on the stock favorable, especially if CVS is able to consummate the reported merger with Aetna," the Needham note says.
  • CVS announced this month that it plans to bring prescriptions "right to customers' doors" with next-day delivery starting in 2018, akin to Amazon's competitive shipping method.
CVS-Aetna deal 'really smart' way to ward off Amazon
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CVS-Aetna deal 'really smart' way to ward off Amazon

CVS Health's bid to acquire health insurer Aetna is a "really smart" way of staving off competition from Amazon.com, according to one Wall Street analyst.

Needham upgraded shares of CVS to a buy rating and bumped its price target on the retail pharmacy, praising the company's proactive actions as competition from e-commerce giant Amazon looms.

"The next month may shape the outlook and direction for CVS for the next 10 years," wrote Needham analyst Kevin Caliendo in a note to clients. "Even in the face of an impending competitive entry in pharmacy by Amazon, we find the risk-reward on the stock favorable, especially if CVS is able to consummate the reported merger with Aetna."

The analyst increased his price target on the company to $79, which represents 14 percent upside from Thursday's close. Caliendo believes a new CVS-Aetna could "easily" grow earnings 10 percent annually down the road, given no hiccups in pharmacy benefit management during integration or lost share to Amazon.

Shares of CVS Health closed nearly 3 percent higher Friday.

The reported $66 billion deal between CVS and Aetna would be the largest in health insurance history. The move is viewed by many on the Street as a strategic play to bolster the defenses of both companies against a potential move by Amazon into the industry.

The $544 billion e-commerce giant Amazon has been quietly exploring ways to expand into the pharmaceutical industry. Jeff Bezos' company has also contributed to the struggles of traditional brick-and-mortar retailers like CVS.

CVS announced this month that it plans to bring prescriptions "right to customers' doors" with next-day delivery starting in 2018, akin to Amazon's competitive shipping method for Prime members.

The company also announced late last month that it would be partnering with Walgreens Boots Alliance in starting the 30,000-store network in an attempt to reduce costs both for the company and for pharmacy benefit management (PBM) members.

"We do think CVS announcing its agreement with Walgreens to create a 30,000 store national network with 10,000 to be named independent pharmacies is a direct land-share grab to limit Amazon's potential partnering options," added Caliendo.

"And the more recent announcement that CVS will provide next day fulfillment to individuals is clearly a service that would compete with Amazon."