Wal-Mart Stores Inc.'s unveiling of a $4 price tag on a collection of generic drugs in its stores in Tampa, Florida will have little to no impact on the profits of either generic drug makers or pharmacy benefits managers, analysts said late last week, because the drugs on the list are already being made by multiple manufacturers and are being sold at a tremendous discount.
"We see the impact on generic drug makers as being minimal to nothing," said analyst Will Sawyer of Leerink Swann, whose coverage universe includes Teva Pharmaceutical Industries and Watson Pharmaceuticals Inc. "You can't squeeze water out of a stone."
First Analysis analyst Gregg Haddad, who covers PBMs such as Medco Health Solutions Inc., Express Scripts Inc. and Caremark Rx Inc., said he similarly saw no meaningful profitability impact on that industry.
Shares in both sectors, however, slumped on the news.
Among the generics, Teva shares were off 3.5% at $32.98 while Watson's stock fell 1.5% to change hands for $26.20. Shares of Par Pharmaceuticals Cos. Inc. were down 2.5% at $19.22 and Mylan Laboratories Inc. shares gave back 1.8% to $20.18 in Thursday afternoon action following the Wallmart move.
Generic drugmaker Par said its agreements with Wal-Mart represents less than 5% of its total net sales, according to spokesman Stephen Mock. It doesn't believe the move will have an impact on the revenue or profits it derives from such agreements.
In the PBM sector, Medco shares were lower by 2.9% at $61.10, shares Express Scripts fell 3.9% to $80.63 and Caremark stock traded at $56.63, down 4.2%.
The program, which will be available to insured and uninsured consumers, will be put in place across the state of Florida in January and will be expanded to "as many states as possible" next year, the world's largest retailer said.
Wal-Mart said it is making nearly 300 generic drugs available at $4 apiece; when the various formulations are accounted for, however, the list of drugs - which includes the painkillers ibuprofen and naproxen and the steroid prednisone - in fact stands at less than half of that.
For consumers, the discounts from the current price tags at Wal-Mart will be significant. At $4, for example, the diabetes drug Metformin will sell for a 49% discount from its current price, the Bentonville, Ark.-based retail giant said.
The impact on the drug makers themselves, however, is viewed as negligible. Most of the products involved are highly commoditized generics that most likely are being sold by manufacturers for well under $4 per bottle, noted CIBC World Markets analyst Elliot Wilbur in a research report.
For its part, Wal-Mart said it's working with drug makers as partners, executive vice president Bill Simon said on a conference call, "not pressuring them to reduce prices."
Nor is this viewed as pressuring PBMs, according to FTN Midwest Securities analyst Michael Maguire. "When you look at this list of drugs, you see a number of medications where the razor-thin margins that are there to begin with are accruing to the retailers, not the PBMs," he said.
"This will have a minimal impact on PBM's margins," said Maguire. "This is not where they're making their money."
The companies expected to be hurt the most are the drugstores operators, and it was reflected in their shares. CVS Corp.'s stock was down 8.6% at $32.38 in Thursday afternoon dealings while shares of Walgreen Co. gave back more than 7% to change hands for $46.30.
Downward pressure on generic drug makers and PBMs will come if the list is expanded to include niche therapeutic products for which there are few manufacturers and therefore little existing pricing competition, Leerink Swann's Sawyer said.
And longer-term, Wal-Mart's buying power could be used to get lower prices from the generic drug makers, according to Banc of America Securities analyst David Strasser.
"While Wal-Mart did not indicate that they are in direct negotiations on particular drugs with drug companies, we believe that their buying power will be used to pressure lower prices and Wal-Mart competitors will pressure the same," he wrote. (MarketWatch)