You've heard this one before so go ahead and fill in the blanks. Wal-Mart drops prices out of the _____ category and the competition gets buried in the process.
Yesterday's announcement by Wal-Mart that it was dropping prices on 291 generic drugs to $4 per 30-day prescription has many wondering if pharmacy competitors will soon find their businesses in a similar situation to what toy stores experienced when the world's largest retailer rolled back its prices right over them.
Patricia Edwards, a Seattle-based money manager at Wentworth, Hauser & Violich, told Bloomberg News, "It's going to change the landscape.' Pharmacies "will lose the margin they've got on those drugs," she said.
Typically, according to Tom Swoffer of Wentworth, Hauser & Violich, margins on generic drugs are 30 to 40 percent compared to 10 to 15 percent on brand-name medicines.
Wall Street saw Wal-Mart's announcement as big news and also bad news for others in retail pharmacy. Drugstore chain share prices were sharply lower in the day's trading. CVS saw its share price drop 8.4 percent; Walgreen was down 7.3 percent; Rite Aid fell five percent; and Longs 4.2 percent.
Wal-Mart will begin rolling out its new pricing at stores in the Tampa, Florida area and will expand it to the rest of the state by 2007. The company said it intends to bring the program to as many states as possible next year.
"Each day in our pharmacies we see customers struggle with the cost of prescription drugs," said Wal-Mart CEO Lee Scott in a company press release. "By cutting the cost of many generics to $4, we are helping to ensure that our customers and associates get the medicines they need at a price they can afford."
The program will help alleviate the coverage gap that many seniors have fallen into what Democrats have described as the "doughnut hole". Many seniors in the Medicare Part D prescription drug plan find, to their dismay, that they are responsible for paying for some or all of their prescription medicines.
Wal-Mart spokesman Dave Tovar told Reuters, "We hope that a lot of customers will take advantage of using this and, if their co-pay is $7, they can come in and pay $4. We built this so that we will make a profit off $4 prescription drugs."
Bill Simon, executive vice president of the Wal-Mart's professional services division, said generics account for roughly 20 percent of the prescriptions the company sells.
In a related story, Target said it would match Wal-Mart's $4 price for generic medicines in Florida.
Discussion Questions: What will Wal-Mart's price cut on generic drugs mean for the retail pharmacy business? What will it mean for pharmaceutical companies in the near and long term?