Competition Deals with $4 Generics

By George Anderson


When Wal-Mart announced its $4 generic prescription program, some moved quickly to match it (Target), others claimed to have a better option (Kmart’s 90-day program) and yet others (CVS) were comfortable enough with existing offerings to stand pat.


Wal-Mart said the plan is working as its pharmacy sales were up in November. That would mean others are seeing sales tail off, right? Not necessarily.


The top three drugstore chains all announced sales increases in November and independent pharmacy groups, such as the National Community Pharmacists Association, say members learned how to deal with large competitors long ago and this new wrinkle wasn’t anything they couldn’t handle.

A Dow Jones Newswire report said Wal-Mart’s increase might be a result
of attracting uninsured consumers that have gone without purchasing prescription
medicines in the past because of the cost.


Mary Sammons, Rite Aid chief executive, said, “Customers chose location, convenience and services over the small price differential on nearly all of the generics on the list. I continue to wonder how long these programs can last since the $4 cannot cover the full cost of dispensing, and you can only sell a product below cost for so long.”


Wal-Mart claims it is not selling the generics below cost. The company has maintained it has made deals with suppliers that enable it to offer the drugs at the $4 price point.

Discussion Questions: Will the $4 generics program
lead to lasting changes in the retail pharmacy business? What do you see as
being the next logical (illogical) step that Wal-Mart or other retailer will
go from the $4 plan?

BrainTrust

Discussion Questions

Poll

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John Keegan
John Keegan
17 years ago

Robert May and Rudolph the Red-nosed Reindeer have some relevance on this topic. Collective thinking hatched this marketing campaign. Sewell Avery and Sam Walton were sharing stories.

As a pharmacy owner I recently completed a cost of dispensing survey at www.2006CostofDispensing.com. Salaries (pharmacist personnel, bookkeeping, technicians), heat, light, insurance, vial costs, label costs, office supplies, bank/credit card charges, accounting and legal fees, security, rent or mortgage charges, bad debt, building investment, computer, delivery vehicle, other Rx computer technologies, telephone, postage, and accounts receivable cover most of the data needed to arrive at the cost of dispensing.

One must add the cost of dispensing to the cost of goods sold. The sum of those two components represent the total cost for a pharmacy operation to place a prescription in the patient’s hands. Currently the cost of dispensing is anywhere from $7.48 to $9.63 per prescription.

If you simply look at that figure you will see that in fact Wal-Mart is losing money, regardless of what they say, on each and every $4.00 generic prescription, nothwithstanding any other sales analysis on companion sales. Wal-Mart would be looking at the average ticket per customer and the total number of customers at the register to justify continuing this program. Just as Rudolph the Rednosed Reindeer story helped to increase total sales for Montgomery Ward the same can be said for Wal-Mart’s $4.00 program. Wal-Mart is a big-box concept, a total different business model than smaller independent pharmacies.

Do I agree that this strategy is brillant? Not really, since it is a fox in disguise. This program is a different spin on established merchandising tactics from distant past; hardly breaking new ground here.

The reason this program has not hurt other pharmacies sales lies in its foundation. I am going to quote Matt Leonard, a senior VP of pharmacy at CVS who issued a written statement, “these 300 drugs are older generics that already have lower reimbursement rates from health plans. They represent less than 10% of the more than 3,000 unique generic products we stock. Cash sales of these products amount to less than one-half of one percent of our total pharmacy sales.”

Whether Wal-Mart can actually drive down generic drug manufacturer prices to a significant amount involves a whole other discussion. The generic market is not the same as other markets. The number of manufacturers making a particular generic, its market potential, and price competition at any given point during the life of the generic dictate price vulnerability. Many of the generics on their list cost have prices eroded to the point that there is not much left to negotiate.

This program has provided Wal-Mart with a very good publicity tool. You have to listen carefully to the wording to get past the hype and digest the substance. As far as sustainability, I believe Wal-Mart will work this one until it doesn’t work anymore. Isn’t that a fundamental concept in marketing? Change the strategy when it becomes stale.

Is it a bold move dealing with the healthcare cost issue? Not really but I will reserve comment for a new thread on what is wrong with healthcare costs from a pharmacist/owner perspective.

Mark Lilien
Mark Lilien
17 years ago

The prescription drug business is growing nicely for several reasons: (1) the graying of America (2) the new Medicare drug plan (3) greater marketing investments by drug producers (4) the continuing flow of new drugs and (5) the fact that most prescriptions are certainly cheaper than hospital treatments and death. The $4 Wal-Mart generics publicity isn’t material compared to the 5 huge growth drivers listed above. Every so often Wal-Mart scores a PR home run.

Kai Clarke
Kai Clarke
17 years ago

I disagree with many of my BrainTrust panelists. This is a huge win for Wal-Mart. Getting people into their pharmacies is a win both for the pharmacy as well as the store. People have to walk into a Wal-Mart store to get to a pharmacy. This forces them to consider buying other products located in the store, or at least increases their awareness of the store’s offerings. Even if this program does not increase the pharmacy traffic, it will increase store sales. This creates a win for the store and for the pharmacy.

Ed Dennis
Ed Dennis
17 years ago

Wal-Mart’s move with $4 generic pricing was brilliant. It provided some very good publicity and Wal-Mart will be credited with all of the other retailers who follow them. Any pharmacist will tell you that profit margins are often much much larger on generics than on non generic drugs. While generics cost the consumer less they cost the pharmacist much much less. In fact, generics are so cheap that Wal-Mart found 400 different generics that they could retail for $4 and still make money. Wal-Mart didn’t say that they would lose money on any of these products just that they would sell them for $4.

Additionally, this bit of marketing did a great job of reinforcing the value pricing that Wal-Mart works so hard to deliver to all of us.

Bernice Hurst
Bernice Hurst
17 years ago

Look away now if you’re not in the mood for a post-holiday, outsider’s view of the American prescription drug market. I’m in the US, as I’ve said before, on a working vacation, travelling from coast to coast with stops in between. Wherever I turn on the television, whichever channel happens to be the affiliate of national networks, I am besieged by commercials for drugs, drugs and more drugs. Obviously because they are required by law to do so, each commercial regales the audience with a description of possible side effects, albeit gently and soothingly read to minimise the seriousness and stress that most people do not encounter any of them. Euphemisms abound – “potentially fatal episodes” may result???!!! Consult your “healthcare provider” – give me a break, puhleese.

Joe Delaney makes some excellent points about Wal-Mart and its generics initiative. They’re really not doing it because they’re such nice folks down there in Bentonville. What I’m waiting for is the big manufacturers to start flinging the mud about the quality of the generics and how they may not be of the same standard of name brands. Ooops, wait a minute, who is manufacturing the generics and selling vast quantities to subsidise their advertising campaigns and other “research”? Could it be that they are actually modifying formulas in order to sell more for less with impunity and anonymity? Is there a plot afoot or is the American consumer really on the receiving end of bargains that could have been achieved years ago? Or is there a price war about to start as manufacturers vie with one another to sell ever cheaper generics? Hold on to your hats, folks, maybe there is a way to reduce the cost of drugs after all.

Joe Delaney
Joe Delaney
17 years ago

The thought that Wal-Mart is leading the way on this is a wee bit off the mark. This is capitalism 101. Adam Smith would be proud. They are trying to get additional foot traffic, polish their image, convince the public that they are the least expensive retailer and drive non-pharmacy sales. They are not doing this out of charity. The unintentional benefit is to those without insurance and that is a very good thing. But let’s not put lipstick on the pig….

As to whether it will lead to lasting changes, it will depend on whether additional, newer, more widely used generics are added to the list.

Bob Bridwell
Bob Bridwell
17 years ago

Anything that gets the discussion going on healthcare & Rx’s is long overdue.

Congress continues to wallow in the pork barrel. Bridges to Nowhere, sewer subsidies and the like. These guys and gals work about 2 1/2 days per week for about 40 weeks and the rest of the time are out fundraising. Instead of trying to solve all the world’s problems, how about just setting a few hard but achievable objectives.

Wal-Mart, like every other company, knows that unless they and we get a handle on this issue that we will all be selling or manufacturing things as a sideline to pay for healthcare. This seems to be just the state our once great automobile industry is falling into.

Charles P. Walsh
Charles P. Walsh
17 years ago

My first impression is that Wal-Mart is probably attracting customers who previously had not purchased prescriptions or had not purchased them on a regular basis as required.

As Art states, anything that can help offset the ridiculously high price of health care and maintenance in this country is welcomed. Wal-Mart has long been a leader in driving industry pricing down, and they will do the same with pharmacy manufacturers. Wal-Mart has the ability to source and label their own “private label” or “generic” products which has tremendous leveraging potential.

I do believe their $4 prescriptions are both sustainable and potentially profitable and believe you will see an expansion of the offer in the future.

Art Williams
Art Williams
17 years ago

While I am surprised that Wal-Mart hasn’t hurt other pharmacy’s sales, I do believe that much of their increase may be coming from uninsured people that weren’t buying in the past. Anything that can slow down or reverse the high cost of prescription drugs in this country is very welcome. I applaud Wal-Mart for leading the way on this.