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

Wal-Mart, the nation's largest retailer, announced it will start selling nearly 300 generic prescription drugs at sharply reduced prices. One of its competitors, Target, responded that it will offer similar cuts. Analysts discuss the new drug plans.

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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.