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Wal-Mart adds drugs to generics program

BY Mike Troy

BENTONVILLE, Ark. —The prescription drug and healthcare marketplace can expect Wal-Mart to be a disruptive force in the future as it targets what company executives characterize as inefficiency in the industry’s supply chain landscape and inflated margin structure as a growth opportunity and a highly visible way to lend credibility to its “save money, live better,” branding initiative.

The most recent evidence of this strategic direction came late last month when Wal-Mart announced an expansion of its $4 generic drug program. The flat-rate pricing initiative roiled the prescription drug industry last year when it was launched on a test basis in September and taken national in November.

Since then, Wal-Mart contends it has saved Americans nearly $614 million dollars by offering more than 330 prescription products at $4. The change, announced on Sept. 27, adds 24 products and a new $9 pricing tier, as three birth control and fertility products now are available. The combination of the program entering its second year and the addition of new medicines will result in “massive” savings to consumers, according to Wal-Mart executive vice president and chief operating officer Bill Simon, who alluded to the possibility of future pricing initiatives when he vowed to “continue to drive this segment until the tipping point is reached.”

But in terms of the impact on the retail pharmacy industry at large, it is expected to be minimal, as many industry watchers still regard the program as a “media stunt” designed to steal headlines for a company subject to frequent criticism and organized opposition, and drive favorable publicity that is well-aligned with its corporate messaging around saving people money so they can live better.

“We continue to believe the Wal-Mart generic initiative is largely motivated by public relations, although the company maintains that the program is profitable,” noted William Blair securities analyst Mark Miller in a Sept. 27 research note. “We believe there is significant leverage on pharmacist staffing, so the marginal labor cost should be well below the average cost to fill—which is above $7 per prescription, in our estimation.

“Of the prescriptions for birth control dispensed at Walgreens—and similar figures likely apply at CVS—only 11 percent are cash-pay prescriptions that would be at risk, according to management,” Miller added. “Those customers at Walgreens [and] CVS with third-party coverage have copays generally well below $9 and thus would not have an incentive to switch to Wal-Mart.”

Citigroup securities analyst Deborah Weinswig agreed that the actual financial impact on pure-play drug chains will remain minimal.

“We expect most consumers who switch to Wal-Mart to be cash payers, of which the 361 drugs represent less than 1 percent of cash sales at most large chain drug stores,” explained Citigroup securities analyst Deborah Weinswig in a September 27 research note. “Additionally, convenience could still trump savings, as 66 percent of consumers choose their pharmacy due to convenience. Consumers may still prefer to go to the drug stores rather than save just $1 to $2 per script—the difference between the average drug store copay and Wal-Mart’s $4 [generic price].”

While the program may not have hurt drug retailers much, since its introduction a year ago, the flat-rate pricing program has proven to be wildly successful for Wal-Mart on several levels, Wal-Mart executives insist. The program has benefited the company both at the top and bottom line, Simon explained, although he stopped short of quantifying the actual impact.

“We are making money and we are making more money than we did on our prescription drugs this time last year,” Simon said. According to Simon, Wal-Mart believes that it is just scratching the surface; margins in the generic drug business are sufficiently plump that Wal-Mart can make further investments in price while achieving a satisfactory level of profitability.

For a company whose station in the business world was achieved by emphasizing supply chain efficiency, Wal-Mart executives argue that the health-care supply chain landscape is one of inefficiency. “There was a massive amount of margin and a massive amount of inefficiencies in these products,” Simon said. “Even at $4, we are very profitable on these items.”

The reduction in price has been offset by a surge in volume, as Simon also said average daily prescription volume has increased dramatically and monthly pharmacy same-store sales have grown at a double-digit rate every month since the program was launched. Products included in the program now account for 40 percent of all prescriptions dispensed at Wal-Mart and that figure is headed higher, as the recent expansion of the program means products used to treat 95 percent of all therapeutic conditions are included in the program.

Despite Wal-Mart’s aggressive actions, leading pharmacy chain competitors have continued to grow their business, as well, although not at the double-digit rate Wal-Mart says it has seen. Walgreens reported double-digit pharmacy comps in four of the past 10 months since Wal-Mart’s program launched and experienced a 13.1 percent gain in January. CVS had one month in which its pharmacy comp nudged into double-digit territory with a 10.8 percent gain in December 2006, while Rite Aid’s peak pharmacy performance came in January with a 5.1 percent increase. Wal-Mart does not disclose monthly same-store sales by department, whereas retail pharmacy chains typically report two separate figures for their pharmacy and non-pharmacy sales.

Based on such results, it would appear more likely that Wal-Mart’s growth has come more from expansion of the uninsured cash-paying customer base and altered prescriber behavior versus actually gaining share at the expense of the drug channel.

“Physicians are more inclined to write a prescription for $4 they know will get filled and refilled and complied with than they are to write a prescription for $200 that they know will never get filled,” Simon said.

As Wal-Mart moves toward the tipping point Simon referenced, it does so under new leadership with a new perspective. Three months ago, Wal-Mart hired Dr. John Agwunobi, the former assistant secretary for health with the U.S. Department of Health and Human Services to serve as senior vice president and president of its professional services division. Simon previously held that role, and was the architect of the $4 initiative, but he was given oversight of Wal-Mart’s U.S. stores division in a management shakeup earlier this year.

“He will be leading this effort going forward and taking us to places that we never imagined we would go,” Simon said.

Agwunobi said he joined Wal-Mart because he wanted to be in a position where he could make a profound impact.

“I think Wal-Mart is going to impact the healthcare community and its customers in a very dramatic way as we move forward,” Agwunobi said. “With programs like the $4 prescription program and the potential for savings, we are really just scratching the surface.”

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Fred’s reports both monthly and quarterly record sales

BY Allison Cerra

MEMPHIS, Tenn. Fred’s Inc. reported record sales for the five-week and eight-month periods which ended Oct. 6, 2007.

The company said Friday that its total sales for the month increased 2 percent to $161.4 million compared to the same period last year. Total sales for the year-to-date period increased 5 percent to $1.157 billion.

Same store sales for the month rose 1 percent on top of a 5 percent increase in September last year. On a comparable store basis, sales increased 1.3 percent through the first eight months of fiscal 2007 compared with a 2.7 percent gain in the year-earlier period. Same-store sales are a key predictor of how well the company performs in stores that have been open for several years, and how well the newly open stores will do in the future.

“September sales came in at the low end of our forecasted range of a 1 percent to 3 percent increase, affected by unusually warm weather across our markets and the disruption caused by the updating of 98 stores under our refresher program,” said Fred’s Stores chief executive officer Michael J. Hayes. “We look forward to finishing our refresher program in October with the last 60 stores and to a better economic environment for our customers going forward, as the benefits of the minimum wage increase and the focus of Federal Reserve Board on the credit crunch take hold.”

Fred’s opened four stores at the end of September, bringing total store openings to 22 for the year-to-date period. These new store openings have been balanced by the company’s decision to close underperforming stores. In the remaining months, Fred’s Stores said that it plans to open 14 additional stores, with no further planned closings, which will result in a net increase in stores of 2 percent for the year.

Fred’s Inc. operates 702 discount general merchandise stores, including 24 franchised stores in the southeastern United States.

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Target to open another 61 stores nationwide

BY Allison Cerra

MINNEAPOLIS Target announced that it will be opening an additional 61 Target stores, the company said Friday.

The stores, which will all open Oct. 14, will open in 22 different states. The majority of the stores are making their debut in Arizona, California, Ohio and Texas.

In addition to offering the latest in trend-right merchandise, Target also brings a 44-year tradition of community involvement. The retail chain commits itself to local communities donating more than $3 million each week to area nonprofit organizations, becoming involved in local volunteerism efforts through Target Volunteers, and orchestrating other special projects that help meet area social service, arts and education needs.

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