WAL-MART RX PRICING CHALLENGES GROCERS

WENDY TOTH

BENTONVILLE, Ark. - While Wal-Mart Stores' plan to sell 291 generic prescription drugs for $4 has not yet drawn supermarket pharmacies into a pricing war, it does have the industry rethinking its tactics.

Analysis of the retail giant's program has shown that direct impact on competing supermarkets and drug stores should be minimal. However, retailers are looking ahead to implications on customer loyalty, health services and reimbursement rates.

"Currently, we are not planning on changing any of our structures or the way we do business and we will continue to evaluate the impact the recent news has had," Maria Brous, spokeswoman, Publix Supermarkets, Lakeland, Fla., told SN. "Our first priority is to our customers and providing quality care."

Because the price reduction emphasizes product rather than service, this program could "devalue" the value-added services that the retail pharmacy industry has been working to provide, said John Beckner, director, pharmacy and health services, Ukrop's Super Markets, Richmond, Va.

"[As a result,] we are not planning on responding with a price reduction of our own," he said. "We are going to stay the course and continue to emphasize service."

Wal-Mart's program, which launched Sept. 22, is available at 65 Wal-Mart, Neighborhood Market and Sam's Club pharmacies in the Tampa Bay area of Florida.

The company plans to expand the program to the rest of Florida by January 2007, and "we intend to take it to as many states as possible over the next year," Wal-Mart spokesman Dave Tovar told SN.

The program covers 30-day supplies of many common generic medications, and may lead some customers, especially those without insurance, to head to Wal-Mart.

Tovar said the lower price is possible through the company's "sophisticated logistics," and "the program is not a loss leader at our company; it is something we intend to make profitable."

"[Conversely,] numerous studies have shown that a pharmacy's overhead to dispense just one prescription is nearly $10, so Wal-Mart appears to be using prescriptions as a loss leader, with the expectation that patients will purchase additional merchandise elsewhere in the store while they are waiting for their prescriptions to be filled," according to a statement from the National Community Pharmacists Association, Alexandria, Va.

Either way, Wal-Mart is most likely able to offer such low costs because of its size, and "the bigger you are, the bigger your discount from the manufacturer," one retailer with a Northeastern supermarket chain told SN.

"You can only commoditize pharmacy so much," Ukrop's Beckner said. "We are not willing to make health care a loss leader."

In response, Target matched the prices in the Tampa market the day of the announcement while Kmart called attention to a similar program it already offers nationwide, which puts 90-day supplies of some generic drugs at $15.

Fred's, a discount general merchandise retailer in the Southeast, began a pilot similar to Wal-Mart's in Memphis, Tenn., locations, less than a week after the announcement.

Despite a drop in its stock prices just after the announcement, CVS Corp., Woonsocket, R.I., and Walgreen Co., Deerfield, Ill., maintain that the program is unlikely to affect their business.

Walgreens stated that nearly 95% of its pharmacy customers have insurance coverage under which the average co-pay for the drugs listed by Wal-Mart is $5.30. For Medicare Part D patients, it is $3.18.

SUPERMARKET OUTLOOK

The general outlook for supermarkets is the same, analysts told SN.

"The person saving the most is the cash-paying customer," said Joseph Agnese, supermarkets and drug stores equity analyst at Standard & Poor's, New York. "But for supermarkets and drug stores, that type of customer represents the smallest group of pharmacy customers, the others being customers who have Medicare and Medicaid, and those covered by third-party insurance companies.

"Wal-Mart already has many more cash customers than supermarkets because supermarket customers tend to be less price sensitive. Because of the large role third-party payors play, supermarket customers are less influenced by price and more influenced by convenience."

So while Wal-Mart may drive some traffic to its stores, a little of that traffic will come from every other type of retail pharmacy, but there won't be a mass exodus of customers from any one type of store, Agnese said.

"[Still,] when you start making pharmacy the loss leader to pull in business, some grocery business is likely to follow," said Verne Mounts, director of pharmacy at Buehler's Markets, Wooster, Ohio.

A longer-term threat lies in changes to the pharmacy reimbursement system, industry experts told SN.

Currently, government-funded insurance plans and many private plans require pharmacies to compare a negotiated plan rate for generic prescription reimbursement, which is the cost of the drug plus a dispensing fee, with the usual and customary cash price, or the amount the retailer usually charges a cash-paying customer.

The pharmacy is reimbursed for the lower of the two, retailers told SN.

Retailers are concerned that if they are eventually forced to discount many drugs to compete, "insurance plans and the government will expect to be charged that lower usual and customary cash price, cutting margin dollars," said John Fegan, senior vice president of pharmacy, Ahold USA, Braintree, Mass.

"[In Wal-Mart's case], it may be that the boon to insurers will be as great as the boon to customers," Edward Weller, retail analyst, ThinkEquity Partners, San Francisco, wrote in a research note.

If the margin on generics, which is usually about 8% or 9%, disappears, "there are a lot of independent stores and small chains out there that can't really take another hit to reimbursement," Mounts said.

"The margin on generics is the only margin left in pharmacy due to third-party reimbursement," he said.

MEDICARE PART D

Additionally, as a result of Medicare Part D, seniors who gained coverage, with more freedom to determine where to fill their prescriptions, "have or might transfer files to community pharmacy from mass merchants," Merrill Lynch analyst Patricia A. Baker said in a report on the topic.

"The timing of the announcement is very interesting because we are in the doughnut hole for Medicare Part D," noted Fegan. That means seniors covered under Medicare Part D who have spent $2,250 under the plan must pay out-of-pocket for their prescriptions until they spend $3,600, at which point they pay for only about 5% of their remaining drug costs for the year.

The implication is that Wal-Mart is looking to attract those Medicare Part D recipients who are currently paying cash. "Wal-Mart is over-indexed on uncovered Americans and has the most to lose with respect to a shrinking cash payment segment," Baker said.

The upside for competing retailers is that Wal-Mart has brought consumer attention to generic drugs, which the retail pharmacy community has been touting as a money-saving alternative to brand-name drugs for both consumers and retailers.

"Interestingly, community pharmacists have historically led the way in dispensing lower-cost medications," the NCPA statement said. Wal-Mart may be responding to critics who have accused it of not providing affordable health care for its own employees, NCPA said.

Overall, this move is innovative and is causing ripple effects in the health care market, Fegan said.

"It is making retailers reanalyze their approach to marketing and buying generic drugs. It is making manufacturers reanalyze their approach to selling and it is making the government and third-party payors rethink what they are paying. So it has really stirred up the pot," he said.