Store wars

Wal-Mart Stores, Inc. has earned a reputation as a company with the capacity to single-handedly shake-up industries. And after forcing supermarkets to the wall following its move into food, the world’s biggest retailer has now turned its attention to the health sector. In a prime example of its ability to drive price competition into a marketplace, Wal-Mart slashed prices on a range of generic drugs across 15 states in October, initially in 235 Florida pharmacies and then, only days later, in an additional 1264 stores throughout Alaska, Arizona, Arkansas, Delaware, Illinois, Indiana, Nevada, New Jersey, New Mexico, New York, North Carolina, Oregon, Texas and Vermont. The Wal-Mart phenomenon had landed on the pharmaceutical sector. The industry shook. Some stocks stumbled. And we have all been left debating the implications.

Certainly from the consumer point of view, cheaper pharmaceuticals can only be something to cheer. And Wal-Mart believes that customer savings on top-selling prescription medications in the program will be significant, estimating that its program’s $4 for 30-day supply price will save customers $7.98 a month for blood pressure drug lisinopril, for instance. And with the retailing behemoth insisting the 291 generic drugs in the program include the most commonly prescribed drugs for some of the most common illnesses facing Americans today – such as cardiac disease, asthma, diabetes and glaucoma – Wal-Mart is convinced that it has delivered the kind of shockwave to which observers of the company have become accustomed.

“Each day in our pharmacies we see customers struggle with the cost of prescription drugs,” Wal-Mart CEO H. Lee Scott, Jr. emphasized at the launch of the program. “Competition and market forces have been absent from our healthcare system, and it has hurt working families tremendously. We are excited to take the lead in doing what we do best – driving costs out of the system – and passing those savings on to our customers and associates.” There was similar enthusiasm from other quarters. “50 bucks for a year’s supply of prescription drugs is a pretty darn good deal for consumers,” enthused US Senator Bill Nelson as the program was rolled out in his state of Florida. “Because Wal-Mart has the ability to shape the market, maybe other retailers will follow suit.”

And we didn’t have to wait long for this prophecy to manifest itself. Rival discount retailer Target almost immediately announced that it would match Wal-Mart’s new drug program and lower prices on generic drugs in some of its stores. Elsewhere, shares of pharmacy chains Walgreens and CVS fell. But with the promise of increased competition amongst retail pharmacies looming on the horizon, it has been the smaller independent pharmacies that have emerged as favorites to be amongst the first casualties.

“It is more difficult for them to compete because the bottom line is a certain minimal cost position for the drugs and Wal-Mart is in a position to almost provide generic drugs as a loss leader which gives it an opportunity to get people into its stores to potentially partake of other goods and services that it is offering,” highlights Terry Hisey, US Managing Principal, Life Sciences at Deloitte Consulting LLP.

Whilst Wal-Mart’s Simon has indicated that the $4 generics are not expected to be a loss leader, a trade association of independent pharmacies has blasted the program as a cynical attempt to get people through the door – and announced that it is seeking a close examination of the anti-competitive nature of the company’s action. In a statement, the National Community Pharmacists Association (NCPA) suggests that the program will provide minimal benefit to patients, adding that “Wal-Mart is known for driving small-town businesses out of business through deceptive and predatory pricing practices and then raising prices on prescription drugs and other health-related products.”

“If you look at the list of medications they are offering for $4, it represents about one percent of the total number of drugs available,” says NCPA Executive Vice President and CEO Bruce Roberts, RPh. “The question people should be asking Wal-Mart is, ‘What will you be charging for the other 99 percent of the medications that people need?’” The Association highlights in particular that the program will offer only about 300 of the more than 11,000 drugs listed by the Food and Drug Administration, and that of that group fewer than 150 separate medicines are actually included, with 12 different versions for example of the antibiotic amoxicillin included on the list.

“Prescription medicines are not a commodity like t-shirts and DVDs,” Roberts adds. “Community pharmacists are in the healthcare business and provide a value to patients no matter what medications they are taking. We are concerned that patients will be both misled and disappointed by the limited number of medicines in this new program.” ("We want our opponents to react to what we're doing, because when we introduce something like $4 generics and our opponents criticize that, it makes them look more shrill, and more out of touch with working families," Wal-Mart Executive Vice President of Corporate Affairs and Government Relations Leslie Dach countered at an analysts meeting days later).

Seismic shifts

Tremors have also been felt elsewhere. The Pharmacy Benefits Manager (PBM) Medco Health Solutions, Inc. followed Wal-Mart’s announcement by introducing its own new plan – Generics First – for discounted generic and branded/specialty prescriptions for small to mid-size businesses. PBMs, which act as intermediaries between drugstores and companies for employee drug plans, can derive a sizeable proportion of their net incomes from transactions involving generics. As such, Wal-Mart’s program could have the capacity to squeeze the sector, forcing PBMs to reduce margins on generics as employers demand similar generic pricing as the retailing giant. Certainly this appeared to be on the mark when Medco made its announcement that it would offer savings of up to half the cost of traditional plans.

But there remains some doubt over the initiative’s influence on PBMs. JP Morgan Chase & Co. Securities Analyst Lisa Gill, for instance, concluded in a recent research note that the impact will be limited. Citing that PBMs have greater negotiating leverage than Wal-Mart; that the retailer does not have exclusive relationships with the manufacturers providing the drugs; that the list does not include several of the recently launched generic drugs that are forecast to be drivers of PBM profit in the near term; and that the generics covered are already cheap and plentiful, Gill’s note states that “for 2006 and 2007, the fundamentals for the PBM industry are the strongest that they have been and [I] do not believe today's news changes that thesis”.

Elsewhere the program has also caused a degree of uncertainty amongst pharmaceutical manufacturers as well. For innovative drug manufacturers, there is the prospect that the media attention that has accompanied the initiative could raise the profile of cheaper generic alternatives. As Florida Governor Jeb Bush highlighted as the program was rolled out on his doorstep, “Wal-Mart is encouraging important conversations between patients and their doctors about the cost savings associated with generic prescriptions. ”

To date, the innovative sector has provided little more than a collective shrug in response. In a statement, Pharmaceutical Research and Manufacturers of America (PhRMA) Senior Vice President Ken Johnson, said that the association – whose members account for 90 percent of brand name drug sales in the US – was still reviewing specifics of the program. Nevertheless, he added, “We support efforts to improve access to affordable health care, including life-improving and life-saving prescriptions medicines…We believe that Wal-Mart’s new initiative, which provides mostly older, generic drugs at low cost, is one way to improve access to some medicines for some people.”

But it is the generic manufacturing field that could play host to the biggest seismic shifts, where the program could drive down wholesale prices for generic drugs. “Wal-Mart is going to exert downward pressure on their generic suppliers, and suppliers will either be able to deliver the drugs less expensively or Wal-Mart will find somebody else who will,” suggests Joseph Paduda, Founder and Principal of consulting firm Health Strategy Associates. “I think this is going to serve to reduce the margins of generic manufacturers and/or shift more of their generic manufacturing overseas – a lot of generics are made in India now, for example. So we might see a shift in generic manufacturing towards more of it being offshored – more than it even is today.”

Kathleen Jaeger, President and CEO of the Generic Pharmaceutical Association (GPhA), believes that it is too early to know what impact Wal-Mart’s plan will have on generic manufacturers, although she stresses that the program “involves products where multiple generic competitors, on average seven manufacturers, are already providing substantial savings to consumers – this competition means that the cost of these products is already low.”

The future of health care

In light of its history in other sectors, it is understandable that Wal-Mart’s decision to flex its muscles in the healthcare industry has caused a stir. And for some, the “Wal-Mart effect” will be as radical as it has been in fields such as food retailing. In the days following the announcement, all kinds of forecasts were flung around – that the costs of drugs will plummet, that reliance on Medicare will decrease, and that the public will be less concerned about needing insurance to purchase their drugs. But this is, in all probability, an extreme and unlikely scenario. As many have highlighted, most of the generic products in Wal-Mart’s program were inexpensive to begin with. And a closer inspection of the list reveals that only one of the top 20 most commonly prescribed drugs is included. By Wal-Mart's own admission, the list represents only one in five drugs filled at Wal-Mart pharmacies.

“Whilst there are a very large number of consumers who will experience some benefit, the drugs that the vast majority of consumers take are simply not available in this sort of deal,” says Paduda. “Furthermore, the drugs that are on the list are predominantly the older generics where there is a large number of manufacturers and there is already significant price competition so that while there are some “very good deals” on some of those drugs, for others the savings are relatively marginal. I don’t see this as a tremendous boon for consumers across the board.”

And now that the dust has settled on the announcement, declarations that the program will lead to less reliance on Medicare and the public being able to be less concerned with insurance to buy their drugs all seem overblown and overexcited. “Individuals will still continue to think about in what way shape or form they are able to get a prescription drug benefit because over time individual company’s and individual distribution outlet’s strategies may change,” states Hisey. “While there might be short-term benefit for the parties involved, that is not a guarantee that that type of pricing strategy is going to be there forever. So individuals, while taking advantage of it, will still have an eye towards the future in terms of making certain that they have a coverage plan in place for the long haul.”

Jaeger still sees positives from the program and the recent press coverage.
“Generic medicines provide consumers with the same medicines as brand name drugs, but at a lower cost…that’s good news for patients and good news for governments as they grapple with rising health care costs. The recent media attention given to Wal-Mart’s action has undoubtedly raised consumer awareness of generic medicines, which is a positive development.”

But what all observers acknowledge will be a success, however, is the program’s impact on Wal-Mart’s image. It has certainly served to provide some positive PR for the retailer. And as it has begun to invest a significant amount in developing health clinics in a number of its stores, coinciding with an increasing shift towards more ‘consumer-driven’ healthcare, the roll-out of the $4 program could prove to be an astute marketing move to encourage consumers to closely associate Wal-Mart with low-cost healthcare. Whether the initiative will have any influence outside of this remains to be seen (“I don’t see that there are going to be an awful lot of repercussions beyond some wonderful PR and some wonderful image work for the folks at Wal-Mart,” dismisses Paduda).

But even though a question mark hangs over the influence of the $4 program, only a fool would write off the retailing giant once it has its sights set on a marketplace. Wal-Mart may still yet have a significant part to play in the future of health care in the US. “There are other interesting things that Wal-Mart is doing in terms of the broader healthcare system,” concludes Hisey. “The whole idea of not only having strong prescription benefit plans but also the ability to offer a lot of other point of care things – optometry services within their stores, for instance, or ‘minute clinics’ where you can get physician visits on a walk-in basis for a wide range of general symptoms. There is an opportunity for some of these things to begin to reshape some of the healthcare access and healthcare delivery in the US.”

Store wars
How will Wal-Mart’s $4 generic drug program influence the healthcare sector?

“Competition and market forces have been absent from our healthcare system” – Wal-Mart CEO H. Lee Scott, Jr.

“The drugs that are on the list are predominantly the older generics” – Joseph Paduda, Founder and Principal, Health Strategy Associates

“Prescription medicines are not a commodity like t-shirts and DVDs” – NCPA Executive Vice President and CEO Bruce Roberts, RPh.

“Wal-Mart is in a position to almost provide generic drugs as a loss leader” – Terry Hisey, US Managing Principal, Life Sciences, Deloitte Consulting LLP

“The recent media attention given to Wal-Mart’s action has undoubtedly raised consumer awareness of generic medicines, which is a positive development” – Kathleen Jaeger, President and CEO of the Generic Pharmaceutical Association