TOPICS > Health

Wal-Mart Cuts Prices of Generic Drugs as Competitors Follow Suit

September 22, 2006 at 6:08 PM EDT
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JEFFREY BROWN: The nation’s largest retailer is about to become a bigger player in the prescription drug business. Wal-Mart announced yesterday that it will begin selling many generic drugs for four dollars for a monthly supply.

The discounts will be available on about 150 different drugs at Wal-Mart stores, beginning immediately in Tampa, Florida, and then expanding nationally next year. The move drew a quick response from one competitor, as Target announced that it would match Wal-Mart’s plan in the Tampa market.

To help us sort out what all this means, we’re joined by Tim Van Biesen, a partner specializing in generic drugs at the global consulting firm Bain and Company. For the record, he consults with major pharmaceutical industry clients.

And David Ridley, an economist who teaches health care management at Duke University.

Mr. Van Biesen, start us off here. Where do the drugs come from? And how can Wal-Mart charge less?

TIM VAN BIESEN, Drug Industry Analyst: This portfolio of products that Wal-Mart is selling now with this four-dollar price point is produced by a broad array of generic drug manufacturers. They really come from all over the world. They’re U.S. manufacturers, Israeli and Indian manufacturers.

They have a choice of where to buy these drugs. They are the lower cost drugs in the system today, and that’s part of the reason why they’re able to price them at this low price point.

JEFFREY BROWN: So, in terms of a business model, is this different from the way Wal-Mart might operate with toys or clothes or anything else?

TIM VAN BIESEN: I think what’s changed here is that Wal-Mart is likely interacting directly with generic drug manufacturers and is essentially cutting the wholesaler or the distribution system out of the equation. And that’s another source of profits in the system that Wal-Mart is essentially dis-intermediating. They’re taking them out.

By contracting directly, potentially, with these manufacturers, they have a little bit more control over what their acquisition costs are.

JEFFREY BROWN: And by selling at this price, would it be taking a loss on the drugs?

TIM VAN BIESEN: That’s possible. It’s hard to say without knowing what the entire portfolio of products looks like. There are many, many more products that more recently off-patent, so to speak, that are potentially at a higher price.

So it’s potential they’re taking a loss on some of these. And it is, like you said, not dissimilar from what they’ve done in toys and other consumer products and clothes, where they work aggressively through their supply chain to find those profit margins that they take out and pass onto their customers.

Beneficiaries

David Ridley
Duke University
Certainly, we would expect that the uninsured would benefit from this. Four-dollar price for a generic is a nice price.

JEFFREY BROWN: Now, David Ridley, there are some real limits on this so far, in terms of the number of drugs and the types of drug in the program. Tell us about that.

DAVID RIDLEY, Duke University: It's my understanding that it's about 300 drugs, but if we count formulations, liquids, solids, it's really only about 120 medicines, so about a fifth of the generics that Wal-Mart sells. My expectation, however, is that we'll see more of this in the future.

You and Tim talked about the fact that they do this for their other products. I'm actually surprised it's taken them so long to do this for generics. So I think we'll see Wal-Mart provide these lower prices for more generic drugs in the future.

JEFFREY BROWN: Well, tell us a little bit about, for context here, the generic drug market. How large a part of the overall market is that nowadays?

DAVID RIDLEY: Well, generic prescriptions account for about half -- I think it's something like 56 percent -- of prescriptions in the United States. That's not dollar values; that's the number of prescriptions. It's much smaller in terms of dollar values.

But it's a significant share of the market, and it could grow in the future, with more branded drugs going off-patent, and with moves like Wal-Mart's move, making generics more appealing.

JEFFREY BROWN: So, Professor Ridley, when you look at this now, what Wal-Mart and now Target are doing, who stands to benefit and how much? Start with, for example, the uninsured.

DAVID RIDLEY: Certainly, we would expect that the uninsured would benefit from this. Four-dollar price for a generic is a nice price.

But uninsured people won't be the only beneficiaries. People like me, paying a $10 co-pay for a generic or higher -- I think the average in the United States is about $10 for a co-pay for a generic, or $30 for a branded drug -- we'll be tempted to go to Wal-Mart for the four-dollar generic that we'd pay cash for, especially -- actually, I'm not a great example -- especially have people who are taking a lot of prescription drugs. They would especially be tempted, I think.

JEFFREY BROWN: Mr. Van Biesen, how do you think see the benefits here?

TIM VAN BIESEN: I think David's right. I think the uninsured are the primary beneficiaries, because it lowers the hurdle to proper medical care. And this will be especially true in the portfolio of products that's included in this type of program is broadened. And there are products in the generic drug portfolio that cost significantly more than these, and they're used more often than these drugs.

This is probably the beginning for Wal-Mart and companies like Wal-Mart. It's the first volley, and they will likely try to expand this to a broader set of generic drug products.

Ripple effect

Tim Van Biesen
Drug Industry Analyst
There are different types of players here. There are those who only sell drugs, the likes of CVS and Walgreen's, and those that sell a very broad array of products, like Wal-Mart and Target.

JEFFREY BROWN: Well, that's where I wanted to go next. I mean, we see Target jump in quickly. Do you see a ripple effect within this industry that has a broad impact generally on drug prices?

TIM VAN BIESEN: I think that that's likely. At this point, it's very difficult to know how that's going to turn out. There are different types of players here. There are those who only sell drugs, the likes of CVS and Walgreen's, and those that sell a very broad array of products, like Wal-Mart and Target.

The implications for Wal-Mart and Target are fundamentally different, in that the money that they make from drugs, generic drugs in particular, is a very small fraction of their total business, so they can do this kind of thing. They can lower their prices so far that they might eliminate the profit margin altogether but increase store traffic. That's a different equation for CVS and Walgreen's.

JEFFREY BROWN: David -- I'm sorry, go ahead.

TIM VAN BIESEN: As CVS and Walgreen's as examples, they rely very heavily on generic drugs, in particular, more than branded drugs, to drive their profits and have less front-of-store sales to offset that loss of margin.

JEFFREY BROWN: David Ridley, how do you see the ripple effect?

DAVID RIDLEY: Well, first of all, Tim makes a good point. He just mentioned that pharmacies make more money selling generics than branded drugs. They make a higher mark-up there. So there's room for the Wal-Marts to put a squeeze on those prices.

Whether or not the other pharmacies will do the same, I'm not sure. They can either try to compete on price or try to compete on convenience, being right there on the corner, ever single corner, or maybe on customer service, saying that they know the customer, they know your needs. But it will certainly put a lot of pressure on them to lower their prices, and you can imagine this is just more bad news for the mom-and-pop pharmacies that are already struggling.

Impact

David Ridley
Duke University
More people will take another look at Wal-Mart, I think especially for chronic conditions. If you're getting this drug every month, the savings add up if you can just pay four dollars for those.

JEFFREY BROWN: So you see a potential negative impact on pharmacies, on the pharmacy chains, on mail orders, and the local pharmacies?

DAVID RIDLEY: I think this will put some pressure on them. Now, again, this is initially rather small-scale. This is not for all of Wal-Mart's generic drugs. But as it moves forward, I think it will put some pressure on them.

There will certainly be patients that would rather go to the convenient corner pharmacy. There are certainly patients that would rather see the pharmacist that they know and have known for years. But it will put some pressure on.

More people will take another look at Wal-Mart, I think especially for chronic conditions. If you're getting this drug every month, the savings add up if you can just pay four dollars for those.

JEFFREY BROWN: So, Mr. Van Biesen, do we think of this -- because we've talked about the limits here -- do we think about this now as an experiment that may grow into something large? Is that the way to look at what's happened so far?

TIM VAN BIESEN: I suspect that that's the case. David made the point earlier that this is happening after Wal-Mart has done this with its various other supply chains in the consumer goods areas. And that's in part true because this distribution system is, frankly, somewhat opaque, and it takes some time to sort out how this works.

They're probably trying this out now, do it in a limited market, do it with a limited subset of the generic drug portfolio, and then begin to understand how to broaden this program. That doesn't mean all generic drugs will be four dollars at the end of the day, but they could certainly tighten the pressure on the entire price portfolio.

Wal-Mart's employees

Tim van Biesen
Drug Industry Analyst
I suspect that Wal-Mart makes these business decisions on the basis of what it thinks is best for the entire business. I'm not sure that they explicitly did it in the context of their own employee and the news coverage that they're getting there.

JEFFREY BROWN: And, finally, staying with you, it's no secret that Wal-Mart is probably the most controversial company in America, loved and hated. And certainly one of the areas that it's been criticized is the health care benefits for its own employees. Every article I read at least raised the question today about whether there was a connection in this move on drug prices to all the negative publicity that it's received. What do you think?

TIM VAN BIESEN: It's hard to say. I suspect that Wal-Mart makes these business decisions on the basis of what it thinks is best for the entire business. I'm not sure that they explicitly did it in the context of their own employee and the news coverage that they're getting there. It's very hard to say, so I don't have a strong opinion on that.

JEFFREY BROWN: Professional Ridley, what do you think?

DAVID RIDLEY: I think Tim makes a good point, that it is a business decision, and it's a logical next step for them to put pressure on generic manufacturers and to cut out the wholesalers.

But having said that, I think Wal-Mart is sensitive to public opinion. They've come out recently in favor of raising the minimum wage. I think they're sensitive to this and that they think this might help with public opinion just a bit. But mainly, mainly for business purposes here, I think.

JEFFREY BROWN: OK, David Ridley, Tim Van Biesen, thank you both very much.

TIM VAN BIESEN: Thank you. Good night.

DAVID RIDLEY: Thank you.