Wal-Mart Rocks Retail Pharmacy Biz with $4 Generics
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?
I think Wal-Mart wins the PR award of the week with this maneuver. Has anyone bothered to check what the previous cash prices were on those 291 generic prescriptions? I’d bet in many instances, the difference is minimal.
In my experience, the co-pay amount charged under most insured prescription plans for a common generic is frequently higher than the cash price. A savvy consumer will ask his/her pharmacist to check this before handing over the co-pay. Buying a 3 or 6 month supply of a maintenance medication using the mail-order option drops the unit price even further. For the pharmacy, it’s the same labor to put 180 pills in a bottle as it is to put 30 in a bottle.
Wal-Mart may have figured out that accepting $4 cash for these prescriptions saves it many more dollars by eliminating paperwork filing costs with the drug plans. Why not pass those operational savings on to its customers?
First of all, Wal-Mart is not doing this just to help out customers and employees so they can have affordable medicines. This is all about helping Wal-Mart. There is no way they can make a profit at $4 a pop. Even if they they had a 100% markup bying at $2 and selling at $4, they still have to pay pharmacists $100k a year to fill them. That would mean a pharmacist would have to fill over 200 scripts a day just to break even.
This is intended to severely punish the competition and get customers inside Wal-Mart. Heck, $4 is cheaper than most copays. There is no need to even get prescription insurance with a deal like that. That could save many companies millions in health care premiums. So non-competiting businesses will be a big supporter of this.
Something about this does not sound fair, but any politician who speaks out against lower drug prices in an election year will be doomed. Wal-Mart knows this and will run roughshod over the competition and the FTC. If someone tries to put a stop to this there will be riots in the streets.
Wal-Mart knows how to build traffic. First it was low prices in underserved rural communities. Then came groceries. Then toys. Now generic drugs. In each case Wal-Mart climbed in less than a decade from no market position to dominance.
For Wal-Mart, if they can increase traffic materially, they’ll get a huge bounce as generic drug buyers stock up on groceries, household staples, and such.
Meanwhile, Wal-Mart’s drug move signals a price war in generic drugs. Target has already followed. Look for Walgreens, CVS, Rite-Aid and the other big players to follow. This is very good news for the American consumer’s healthcare budget.
It’s easy to say this will put all kinds of pressure on pharmaceutical margins and — in the long-term — it will. But, it’s hard to get people to change pharmacies in the short run. As to manufacturers, I think any impact won’t be felt until much farther down the line.
Hey Chicago government authorities, aren’t you glad you banned Wal-Mart to protect your citizens from this type of outrage?
Low cost prescription drugs!? Oh, er, was that low wages? Oh I can’t remember, it was just that something was low which was bad for the down-trodden population of Chicago.
Thank you for your protection oh wise and selfless ones….
Interestingly, Wal-Mart does it in a state of winter birds and the elderly. So, I would think most competitors would match, to see the impact on their business.
For me, this appears to be a last ditch resort of Wal-Mart to secure more overall business, and/or gain more new shoppers.
I’m also wondering if, in time, Wal-Mart may offer these possible new customers of prescriptions, the option of delivery by mail.
Many variables for a test market scenario. Hmmmmmmmmmm
Wal-Mart’s $4 generic drug pricing will be matched by its competitors. Target has already said it will meet Wal-Mart’s pricing. The next act in this play isn’t clear yet, but expect wily Wal-Mart to continue to cause more pricing anxiety for its pharmacy competitors … and for drug manufacturers.
The following is from a press release from CVS with the quote attributed to Matt Leonard, RPh, Senior Vice President of Pharmacy at CVS/pharmacy.
“These 300 drugs are all 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 that we stock. Cash sales of these products amount to less than one-half of one percent of our total pharmacy sales.
“For customers who have prescription coverage, the average generic co-pay is relatively nominal. For example, the generic co-pay for Medicare prescription drug plans is typically $5. Furthermore, under many health plans, the price paid by the consumer for some of these drugs is actually less than $4. In addition, beneficiaries who reach the so-called ‘donut hole’ in Medicare Part D coverage pay the plan price, which can be less than $4 for a significant number of these drugs.”
This was expected, wasn’t it? The big guys will always have an upper hand; One move and they have everyone running for cover.
What does this mean for the other retailers?
Nothing, really!!
There are a few things that they could use –
1) Their Reach — Most of the Prescription Drug Consumers are the baby boomers, for whom what matters is convenience in terms of availability. Lets face it, can Wal-Mart match the reach of, let’s say Walgreens or CVS? I guess not!!
2) Online purchasing — This is one important addition to the Drug Store Business.
3) Negotiations with Manufacturers — When it comes to generics, the retailer is the King. You just have so many Manufacturers, that it becomes a matter of retailer choice.
What does it mean for the Manufacturers?
It will pinch their pockets for sure, considering the stiff competition.
I don’t think Walgreens, CVS or even Rite Aid need worry about this Wal-Mart strategy, unless of course they fail to capitalize on their advantages.
It is scarcely a secret in the industry that the major drug chains have been targeting Wal-Mart in particular with constant hot features on name brand OTC products. It is an understandably effective strategy to attack Wal-Mart’s “everyday low price” pledge with hi-lo tactics that fit the drug chain merchandising philosophy. It’s no different than punching out potato chips at 2 for $2 to shortstop traffic headed to the grocery store in the strip mall directly behind the stand-alone Walgreens.
Now Wal-Mart has reached to their strength and said “Ok — let’s rumble.” They know the profit structure of the drug chains rests on pharmacy first, front end second. And the irony of starting this strategy in Florida is less than opaque, to say the least. As Mr. Twain (or maybe Will Rogers? someone help me out here!) once said — “this is gonna get interestinger and interestinger!”
Has anyone asked the pharmacist what they think of this? The business of medication is a large one with large responsibilities. The pharmacy has a legal responsibility to double check prescriptions to insure that adverse reactions don’t occur. This takes time and requires diligence. The fact of the matter is that the pharmacy profession has some of the highest standards of any industry and pharmacist will not dispense until they are satisfied that drugs will not do harm. Wal-Mart, has made this decision with out consulting those who are dispensing these $4 generics. The increased volume will require more pharmacists and they just aren’t available. I predict that Wal-Mart will find this effort unmanageable and have to withdraw the offer. At the least they will not be able to expand to other markets. Just think — one mistake caused by rushing a pharmacist will end up in court with a jury looking into Wal-Mart’s pockets and finding an unlimited reward for the attorney and his client.
The battle now moves to the pharmacy counter. Just when pharmacists thought things were going to calm down after all the issues they faced with Medicare Part D, now comes this. There’s not a pharmacist anywhere who is not having to answer questions today from people challenging them regarding the price of generics. There is another side to this and that is how “big pharma” is going to respond. As we enter into the cold and flu season, the major drug companies always unleash a round of advertising. Watching how they chose to respond will be interesting in particular, considering this is an election year and you can bet many a politician will jump on this issue and everything that goes along with it — including the importation of drugs from Canada. Big pharma would be best to keep a low-profile in an attempt to let this blow over and not get any more politicians in on the issue.
The announcement fits well with Wal-Mart’s desire to burnish its image in healthcare. As a practical matter, it probably will have little effect on Wal-Mart or its competitors. But, Wal-Mart is getting a lot of free and mostly favorable publicity. It will get some additional traffic flow until consumers determine whether it has any benefit to them. So overall, this is a “big news” announcement that has little downside to Wal-Mart.
Without a doubt, this is a loss-leader. Even if the patients entered their own prescriptions at a kiosk and pills were dispensed with a robot, it wouldn’t pay. Too much management/control and other hassle time on the 10% problem cases. But then there’s the ever so powerful convenience factor, not just for Wal-Mart stuff, but for other more profitable drugs which are often prescribed for the same illness. Then there’s all the other stuff. Other stores could do it – why not free drugs? But they’ve got to sell all the other stuff too.
If one considers Wal-Mart’s customer base now and in the future, it is clear that addressing the needs of the baby boomers would be a good strategy. Although this segment is considered to be relatively affluent, they have grown up in an environment where “deals” are important. Something as basic as prescription meds will certainly change the shopping behaviour of some boomers who perhaps would not have considered Wal-Mart as a destination.
By increasing boomer (and other) footprints in the store, Wal-Mart can increase sales of higher margin items that are merchandised near the counter as well as in the store itself. I find it hard to believe that Wal-Mart (or any company) would knowingly reduce margin without having a growth strategy in mind.
Retail pharmacy businesses that are not market-oriented will have to develop strategies to differentiate themselves from Wal-Mart. Aside from price, there are other consumer needs that may not be met by Wal-Mart.
One that I value is convenience. Our local Wal-Mart is situated within walking distance of a retail pharmacy chain and a grocery chain with an in-store pharmacy. The dispensing fee ranges from about $6 at Wal-Mart to about $12 at the retail pharmacy chain. During cold and flu season, the pharmacy area at Wal-Mart looks like the security checkpoints at major airports! Contrast that with the drive-thru that the pharmacy chain offers. Yes it will cost me $12 to get the prescription filled but I am sitting in my car instead of waiting for an hour to get my meds.
If I need to buy some groceries, then it makes sense to go to the pharmacy at the grocery chain – even if it is a few dollars more. If I was planning to shop at Wal-Mart anyway then it is not much of an issue…but time is money!
The higher priced options also provide other convenience benefits like accepting fax prescriptions directly from doctors.
Pharmaceutical companies in the near term will have to offer additional “value” to their other customers in order to maintain a positive relationship. Competing retail chains will demand support to help them meet Wal-Mart’s $4 price point. Support can be in areas outside of direct price: longer payment terms, higher advertising allowances, freight assistance, etc.
I don’t believe that it will have any significant impact on the pharmaceutical companies in the long term. If a retail pharmacy chain wants to offer generics to their customers, they will have to source from one of the pharmaceutical companies. There are not as many substitutes as there are in CPG categories, for example.
I agree with James Tenser and find George Anderson’s quote from Matt Leonard of CVS very revealing. Wal-Mart needs consistent positive publicity and this seems to be a low-cost way to get it. Low prices on drugs puts Wal-Mart on the side of the angels. Chain drugstores should be more concerned about state and federal budget cuts that will cut their dispensing price allowances.