In a move that follows a similar direction to the one being taken by bigger competitors such as CVS Caremark (NYSE:CVS) and Walgreen (NASDAQ:WBA), Rite Aid (NYSE:RAD) is expanding into health-care services and retail clinics via the acquisition of Health Dialog Services and RediClinic. Is this the right path to healthy profits for Rite Aid?
Healthy growth opportunities
Rite Aid is in the midst of a transformation. The company is trying to move beyond the turnaround phase and position itself for growth during the coming years. Recent acquisitions are indicating that management is betting on health-care services as an important growth driver in the years ahead.
Health Dialog Services is a provider of health-care analytics and decision support. The company´s offerings include health coaching for medical decisions, population analytic solutions, and consulting services. This acquisition should be a considerable plus in terms of strengthening Rite Aid and its Health Alliance strategy.
RediClinic operates 30 retail clinics in the greater Houston, Austin, and San Antonio areas. The company provides treatment and prescriptions for more than 30 common medical conditions. In addition, RediClinic provides a range of preventive services, and it offers a weight and lifestyle management program that it also licenses to other providers.
Rite Aid is planning to open another 70 RediClinics during the next 18 to 24 months, so management is clearly making a big bet by expanding into health-care services in the middle term. Only time will tell for certain if this is a smart move or not, but the plan makes a lot of sense.
Healthcare demand is being supported by strong secular tailwinds such as broadening health-care insurance coverage, demographic trends like an aging population, and technical advancements in different areas of medicine and health care.
According to the Association of American Medical Colleges, there's a growing shortage of primary care physicians in the U.S., and demand is expected to outweigh supply by 45,000 physicians by 2020. This bodes remarkably well for Rite Aid and its growth plans in the retail clinics business.
Following the big guys
MinuteClinic has been a very smart move for CVS Caremark, both strategically and financially. CVS Caremark operates 828 clinics in 28 states plus the District of Columbia, providing access to affordable walk-in health-care services seven days a week without an appointment. MinuteClinic relies on a team of nearly 2,200 nurse practitioners, and it offers clinical affiliations with more than 30 major health systems.
CVS Caremark reported an 11.4% increase in revenues from its MinuteClinic operations during the first quarter of 2014. The company opened 28 new clinics during the period, and it plans to open at least 150 total clinics during the year. On a longer-term basis, management plans to have a footprint of about 1,500 clinics in at least 35 states by 2017.
MinuteClinic is not only about direct revenues for CVS Caremark. Management estimates that prescriptions written at MinuteClinic are filled at CVS pharmacies more than 95% of the time, so opportunities for cross-selling look quite interesting as the company continues expanding its clinic footprint in the years ahead.
Walgreen is materially behind CVS Caremark when it comes to retail clinics, but the company is clearly moving in the same direction. Walgreen has nearly 400 health clinics, and the company is planning to add 100 new clinics during 2014.
Walgreen's president and CEO Greg Wasson sounds quite optimistic about customer demand in the segment. "We are experiencing growing interest from customers in value convenient, affordable, high-quality health care services," he said.
The fact that bigger players, such as CVS Caremark and Walgreen, are expanding their presence in the retail clinic business means that Rite Aid will be facing considerable competition in that space. On the other hand, long-term opportunities for growth seem to provide enough room for multiple players to profit at the same time. Besides, investors should feel comforted by the fact that Rite Aid is going down a tested path to growth and profitability.
With acquisitions such as Health Dialog Services and RediClinic, Rite Aid is betting on health-care services as a strategy for growth. Although it's still too early to make a definitive assessment about this move, attractive industry fundamentals, and the successful experience of CVS Caremark and Walgreen in that area, could be indicating that Rite Aid is expanding in the right direction.
Andres Cardenal has no position in any stocks mentioned. The Motley Fool recommends CVS Caremark. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.