Wal-Mart's Generic Prescription Plan: The Connection to Pharmacy Benefit Managers and The Big Drug Chains

Consider this quote from a Barbara Martinez article in the Wall Street Journal on May 9, 2006 based on transcripts from an Ohio Teachers suit against Medco Health Solutions (MHS) for breach of fiduciary duty:

"Medco says that after overhead its profit margin on mail-order generic drugs for the retired Ohio teachers was only 23 percent and its total margin, after losses on brand-name drugs, was 1 percent."

In other words, the Big 3 Pharmacy Benefit Managers - Medco, Express Scripts (ESRX) and Caremark (CMX) - have been cross subsidizing low to nil margins on mail order brands, and no general management fees, with high margins on mail order generics.

Furthermore, the Big 3 PBMs basically set the price of their retail competitors -- Walgreen (WAG) and CVS (CVS) -- an example of conflict of interest and self-dealing if there ever was one.

Wal-Mart (and for that matter Costco) know of this cross-subsidy and do not need high margin generics to cross-subsidize other lines (eg. mail order brands for PBMs and the front store operations of WAG and CVS).

The pressure for better prices on generics will come from plan sponsors that contract out to PBMs -- the United Healthcare (UNH), the Blues, Principal, Humana, GM, Ford, IBM, Medicare, Medicaid.

This will force PBMs to respond by reducing their margins on mail order generics, will force WAG-CVS to do likewise at retail, and to make up the shortfall with higher prices elsewhere (management fees, mail order brand margins for PBMs, and front store margins for WAG and CVS)

That is the connection between the Wal-Mart (WMT) announcement and its effect on stock prices of other drug supply chainers.

Comment on this article; see also more analysis of the pharma stocks.

Comments

[Wilma Bigger:]

What the article does not mention is that the government has long allowed the drug companies to dictate drug selection to the physician and pharmacy communities. Insurance companies and benefit Plan management are part of this and it includes a great degree of price fixing and over charging. I do not use the Wall-Mart pharmacy but certainly support their pricing plan.

2006 Sep 22 06:28 AM

[Paul Meisel:]

Finally, a little competition in health care!

2006 Sep 22 06:33 AM

[Lily:]

Suddenly people who watch 30 second commercials are telling their doctors what pills they should be taking. Ridiculous! The average joe doesn't know that a drug like Caduet has two ingredients that can be purchased MUCH cheaper separately than together. One is Amlodipine and the other is Atorvastatin. With my RxDrugCard I can get 30 tablets of Amlodipine for $9 and 30 tablets of Simvastatin for $9. I’ll bet they are charging more than $18 for this new drug! I think that RxDrugCard.com is the best drug card available for prescription discounts. The monthly family membership fee is only $4.95! You can’t beat that!

May 19 12:02 PM