Slow and steady: CVS' entry into Brazil a slow dance, not a samba

It's official. During its most recent quarterly conference call with analysts, CVS Caremark revealed what many had anticipated: Its acquisition of privately held Brazilian drug store chain Drogaria Onofre was complete.

The move is not financially material to CVS Caremark, but it does mark its first foray into the international drug store space. The 44-store chain is the eighth-largest drug store chain in Brazil and, according to published reports, posted gross revenue of R$1.2 billion (Brazilian reals) in 2011.

"As you know, we have been exploring opportunities for possible international expansion, and we have said many times that our approach would be measured and we would exercise financial discipline. We believe this acquisition is a great example of that strategy and action," Larry Merlo, CVS Caremark president and CEO, told analysts.

CVS Caremark's measured approach to international expansion is quite different from the approach taken in 2012 by rival Walgreens, when it acquired a 45% stake in the U.K.'s Alliance Boots — with the option to acquire the remaining 55% stake over the next three years — in a move that thrusts it into 25 countries, including several high-growth pharmacy markets in Europe and Asia.

"Onofre has a strong reputation in the marketplace. They do a great job in tailoring their stores to market to different customer segments. And we view Brazil as an attractive market," Merlo told analysts.

In Brazil, pharma sales from 1996 to 2012 have grown at an approximately 12.5% CAGR, with generics up 25%, Citi Research analyst Deborah Weinswig stated in a recent research note.

"Growth in the market has been driven by the combined impact of declining unemployment, growth in real incomes and the aging of the population. Additionally, there has been an increase in individuals covered under healthcare plans, and the number of available insurance plans has recently doubled," Weinswig stated.

There currently are about 3,760 drug stores in Brazil, and the top five chains have roughly 30% of total sales — the top 10 chains represent 34% of sales — Weinswig noted, and independents account for 48% of sales.

Past consolidation in Brazil has been mostly local, and CVS Caremark is the first foreign company to enter the Brazilian drug store space. And it is speculated that the move by CVS could spawn the next big round of consolidation. In fact, Merlo indicated that there could be other opportunities for the company in Brazil.

"I think one of the other keys for us is the market is recessive to chain pharmacy. Chains are pretty prevalent in the Brazil market, but at the same time, it's still fragmented. I think the largest player has about a 9% share," Merlo told analysts. "So we see the opportunity for growth and, … there may be other opportunities acquisition-wise as we move down the road."

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