Wal-Mart Pressures Drugstores

NEW YORK CITY-Wal-Mart’s decision to sell generic drugs for $4 per prescription will not cut appreciably into other chains’ prescription drug sales, according to some market analysts who follow the drugstore chain business. Others say the move could be the first salvo in a battle that will change the generic drug retailing landscape.

A report by Lehman Bros. says that many customers of Wal-Mart’s competitors are already paying only $10 or so for prescriptions and are therefore unlikely to switch from the convenient drugstore locations where they now obtain their prescriptions. “A chain drugstore customer will now have to choose if the average out-of-pocket cost savings of $6 per drug is worth the time and energy required to switch a prescription to Wal-Mart and drive the extra distance to a Wal-Mart store,” the Lehman Bros. report says. It also says, “We do not believe the drug retailers will see a meaningful impact” from the $4 prescription price.

Bear Stearns, however, sees that the consequences of the Wal-Mart move ultimately will be “categorically negative for drug retailers” and to a lesser degree for supermarkets with drugstores. It says that “Outsized generic gross margin have afforded Wal-Mart a competitive opportunity,” and it points out that “Wal-Mart, consistent with its history, is assaulting a retail business that possesses outsized margins.”

The Lehman Bros. report explains that the difference between the $4 Wal-Mart prescriptions and prices at other chains are not that great. Customers who have insurance coverage are paying on average a $10 co-pay for generic drugs. “We believe that in general the drug chains’ convenient locations, combined with the close relationship many customers have with their pharmacists, will limit the amount of switching to Wal-Mart,” Lehman Bros. says.

Wal-Mart’s plan is to sell generic drugs for $4 in its Tampa, FL stores as a test market, and Target has already said that it will match the $4 price in the Tampa market. The Wal-Mart test covers about 150 drugs that it formerly sold for $10 to $30, all of which are older generic medications that have already gone through their period of peak profitability for drug retailers. The Arkansas-based chain says that if its stores get the increased volume needed to offset the lower profits, the program will be rolled out to the rest of the Florida stores in January 2007 and other states during 2007.

Bear Stearns says that it fully anticipates that Wal-Mart will roll out the program nationwide, particularly with Target already following its lead. “While initial price cuts involved limited number of generics, this could only represent a first wave of cuts,” the report says.