Wal-Mart Cuts Prices for

Many Generic Drugs to $4

By Gary McWilliams and Barbara Martinez

Wall Street Journal

September 22, 2006

Wal-Mart Stores Inc., long attacked by some critics for its employee health-care benefits, waded into the nation's health-care debate and its rivals' pharmacy businesses by promising to cut the price of some of its generic drugs to $4 for a 30-day supply.

The Bentonville, Ark. retailer said it will use its purchasing and distribution prowess to offer versions of about 150 different generic drugs, such as the antibiotic tetracycline, at prices on average 20% below its existing ones. The drugs are mostly older medications; the company said it plans to add more popular drugs later on. Wal-Mart implemented the price policy yesterday at 65 stores in the Tampa , Fla. area, and early next year will expand it to about 170 other Florida stores before taking the policy nationwide later next year.

The savings on some drugs will be considerable compared to rival pharmacies. For example, under the new plan, Wal-Mart will charge $4 for 850 milligrams of the diabetes treatment metformin, compared with $17.72 at other Florida stores and $28.19 at Walgreen.

GENERIC DRUGS FOR $4

 HSBC securities analyst Mark Husson discussespharmacy stocks with CNBC, saying, "If Wal-Mart starts to dictate terms for the rest of the industry, that's not a particularly attractive place to be for rest of the industry to be."

Richard Hastings, senior analyst at Bernand Sands, tells CNBC that even Wal-Mart's incremental moves like a $4 prescription price will have a profound effect on the competition and the economy in general.On other drugs, however, Wal-Mart's new price still isn't below the competition. Wal-Mart's new price for the popular blood-pressure medicine atenolol is $4 for 30 pills, down from $8.62. Costco Wholesale Corp. lists a price of $3.69 for 30 pills on its Web site.

Wal-Mart's move drew praise from doctors and health-care experts but mostly shrugs from rivals who dismissed it as a publicity move. For now, the price cuts will apply to fewer than 300 formulations of 150 drugs, a fraction of the roughly 2,000 generic drugs sold in most pharmacies. The reductions are unlikely to be costly to Wal-Mart, which along with other retailers already buys many of these drugs at "pennies per pill or less," said Elliot Wilbur, a generics-industry analyst at CIBC World Markets.

Wal-Mart cast the change as a boost to the nation's uninsured and a savings even for those with health insurance. The pricing "aims to provide access and affordable health care to our customers and associates," said Bill Simon, a Wal-Mart executive vice president. Wal-Mart plans to add generic versions of widely used drugs such as cholesterol-lowering Zocor, at lower-than-existing prices "at some point in the not too distant future," he said.

If it does extend the price cuts to more popular generic drugs, Wal-Mart will put pressure on other retail pharmacies and generic drug makers to reduce their margins too, just as it has in groceries and toys, said Tim van Biesen, a Bain & Co. partner and generic-drug industry expert. "Typically when they start down this path, they don't stop," he said.

The stocks of generic-drug makers and drug-store chains tumbled yesterday as investors weighed the potential inroads of Wal-Mart on the business. In 4 p.m. trading on the New York Stock Exchange, shares of CVS were off 8%, or $2.96, at $32.47, while Walgreen Co. fell 7% or $3.67. Wal-Mart shares were off just 41 cents at $48.46.

Wal-Mart's new plan could also put pressure on big pharmacy-benefit managers, or PBMs, who administer the drug benefits for many employers and health plans and who operate their own mail-order pharmacies that compete with retail pharmacies. Like retail pharmacies, PBMs make much of their profits from the big margins on generic drugs they sell through the mail.

Bain & Co.'s Mr. van Biesen said because generic drugs carry a higher profit margin at retail than branded drugs, Wal-Mart can clip its profit on the drugs and use any increased store traffic to sell more profitable non-generic items. "It was frankly just a matter of time before someone decided to chip away at the generic-drug distribution system," he said.

He said even an expanded roster of drugs would have little impact on the nation's overall health-care costs, however. Pharmaceuticals account for just 15% of all U.S. spending on health care and generics are a fraction of all pharmaceutical revenues. "What it does is provide access to the uninsured and [Wal-Mart's] own employee base," he said.

The announcement yesterday drew politicians to a Tampa Wal-Mart where Florida Gov. Jeb Bush praised the local price drop as "good corporate citizenship," and U.S. Sen. Bill Nelson lauded it as "a pretty darn good deal for consumers."

Critics called the effort "marketing spin" and pointed to what they characterized as Wal-Mart's less-than-generous employee health-care policies, in which employees bear a big share of the costs. Partly as a result, many Wal-Mart workers don't even sign up for insurance.

WakeUpWalMart, a group financed by the United Food and Commercial Workers union that aims to force the company to change its labor policies, said in a statement: "Wal-Mart cruelly ignores the fact that it fails to provide company health care to over half (775,000) of its employees."

Wal-Mart's Mr. Simon rejected any characterizations of the pricing cuts as a marketing ploy. Mr. Simon insisted a standard pricing for common generic drugs wasn't about legislative issues, or attacks on its wage, environmental and employee health insurance policies. "We're certainly hopeful this is a positive business move ... as well as a significant social benefit," he said.Wal-Mart expects to slowly implement the price changes at its more than 3,000 stores nationwide, citing the need to hire additional pharmacists, and strike agreements with additional generic drug makers. Mr. Simon declined to disclose what impact, if any, the company expects on profits at its about $20 billion a year pharmaceuticals business, or its generic-drug market share.

Pharmacy chains dismissed Wal-Mart's initial effort and said it would offer little competition. "A lot of the medications are very old generics," said Walgreen spokesman Michael Polzin. "I don't think the price change for a lot of these is that much." Mr. Polzin said Walgreen plans no pricing changes in response.

Almost 95% of Walgreen's prescriptions are covered by insurance, with the remainder covered by cash payments, Mr. Polzin said. The savings from a typical $5 co-payment "is not enough of a difference," to cause customers to change pharmacies, Mr. Polzin said. "Our convenience and locations have proven over the years to have a bigger effect on behavior."

Richard Hastings, senior retail analyst at Bernard Sands LLC, said those companies likely to be hurt would be "smaller prescription drug buyers, including certain supermarket chains that offer pharmacy services." In a research note, he wrote that those companies "will see some margin erosion if they are forced to compete on price."