Politics from the Palouse to Puget Sound

Sunday, September 24, 2006

"Analysts:Retailers' move marks sea change in pricing"

From today's Lewiston Tribune:
Target has decided to copy Wal-Mart's plan to sell $4 generics -- a move that experts say is likely to create a completely new and cheaper pricing structure for America's off-patent medicines.

"I think you're going to see very simplified pricing for generics in most places now," said Richard D. Hastings, an analyst with Bernard Sands. "You're not going to be seeing $10 here and $16 there and $20 over there" for the same generic drug -- a pricing chaos that frequently exists now.

On Thursday, Wal-Mart shocked the retail industry by saying it would offer 30-day supplies of 291 generic drugs for $4 in Tampa immediately, expand to the rest of Florida on Jan. 1, and then roll it out to the rest of the nation.

Target, the No. 2 discounter, said it planned to copy the nation's No. 1, but its press release issued late Thursday evening mentioned only the Tampa area. The Minneapolis-based company didn't respond to The Miami Herald's question on Friday about whether it would match the $4 price elsewhere in Florida.

But Hastings said he believed it inevitable that not only Target but also Walgreens and CVS would follow Wal-Mart's lead nationwide. "They're capable of doing that" without hurting their bottom line, said Hastings.

However, Walgreens spokesman Michael Polzin said, "We have no plans to do a program similar to Wal-Mart's." He noted the rival's program covers only a fraction of the 2,000 generics Walgreens and others sell.

What's more, 95 percent of Walgreens customers have insurance, and for the 291 medications Wal-Mart is selling for $4, the average co-pay for $5.30 for nonseniors and $3.18 for seniors with Medicare Part D, Polzin said.

Experts believe there is plenty of room for price reductions in generics. Neil Flanzraich, former president of the Miami generic drug maker IVAX, said Friday that while generics often cost just pennies a pill to make, "it's generally been admitted that in all the pharmacy chains, the biggest profit margin they get is on generics."

"So Wal-Mart is lowering that somewhat," said Flanzraich. "That's a positive sign."

The Generic Pharmaceutical Association noted that the $4 drugs tend to be older generics, with an average of seven manufacturers making each of the cheap drugs.

Newer generics, such as simvastatin, the generic for the blockbuster cholesterol drug Zocor, go much higher -- about $125 for a month's supply. Teva, the purchaser of IVAX, is one of only three companies making that tablet, and it has 180 days of exclusivity for some dosages.

WakeUpWalMart.com, an anti-company site run by a union, criticized Wal-Mart for not including generic Zocor in its bargains and noted that, while the company had boasted it was lowering prices on nearly 300 generics, the company's list showed "only 124 separate medicines," many of them in multiple doses.

Still, of the top 10 selling generics in 2005, Wal-Mart and now Target will be offering the $4 price for six of them.

In recent years. generic sales have soared, pushed by employers and large insurers concerned about drug prices increasing about 10 percent a year since 2000, according to industry data.

Generics now represent 56 percent of all prescriptions dispensed annually in the United States, but because of the huge cost of branded drugs, they account for only 13 percent of dollars spent, according to the Generic Pharmaceutical Association.
This is a big deal. The story rated a banner headline on the front page of the Friday Tribune. It was, however, buried on page 7A of the Thursday edition of the Daily News, whose publisher seems to think Wal-Mart has "minimal benefits." Heck, I even saw a TV ad from Senator Cantdowell last night claiming she would fight to lower drug prices. Sorry, Maria, Wal-Mart beat you to the punch.

High drug prices hurt many people in this country, particularly the elderly. That is why many people go to Mexico and particularly Canada in search of cheaper medications. In fact, Congress just eased restrictions on crossing the border back into the U.S. with up to a 90-day supply of prescription drugs. Mail order or Internet purchase of drugs is still prohibited.

As with anything else, what is needed to lower drug prices is more competition. Wal-Mart has taken the first step in that process. Now others are following.

It figures Wal-Mart's critics would slam the company, even when they do something good. It just makes them look even more shrill and irrelevant. How could they possibly expect Wal-Mart to offer a $125 drug for $3?

Some will probably even say that this is just a "Wal-Mart publicity stunt." Who cares if it is or not? We all will benefit. If some store was handing out $100 bills as a "publicity stunt," I'd be a fool not to take one. And I'll also take practical corporate action over lofty political rhetoric any day of the week.

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Paul E. Zimmerman said...

This move has me thinking of adding Walmart to my investment portfolios. I typically go for higher dividend yields than what I would get on their shares in the present, but since their dividend tends to be increased each year, in the long term it could catch up with my other positions. And long term is how I'm viewing this possible buy, especially following the generic drug move.

It is events like this that underscore why it is that I will take the free market over the empty promises of politicians every time. EVERY time.

Tom Forbes said...

Smart idea, Paul.

A lot of Wal-Mart's recent moves (carrying more organic foods, going "green", and now the lower generic drug prices) on the surface seem to be aimed at appeasing critics.

However, Wal-Mart is the best in the industry at identifying what its customers want and gaining a competitive advantage, and I think a healthy bottom line is more of a factor in these decisions than mollifying Wake Up Wal-Mart or Wal-Mart Watch, which is impossible in any case.