Wal-Mart expands $4 generic program

BENTONVILLE, Ark. Wal-Mart this morning expanded the list of drugs available under its $4 generic program and added a new $9 pricing tier for birth control and fertility products.

The combination of those changes is expected to result in massive savings for consumers, Wal-Mart executive vice president and chief operating officer Bill Simon told members of the media and financial community during a conference call. Since the $4 program was introduced last year, it has saved consumers $610 million and the 331 drugs that are part of the program account for 40% of the prescriptions filled at the more than 4,000 pharmacies located in Wal-Mart Stores, Sam’s Clubs and Neighborhood Markets, according to the company. With the changes announced this morning, the program now includes a total of 361 products made up of 157 compounds that cover 95% of the conditions for which doctors write prescriptions, according to Simon, who added those products will account for a figure well north of 40% of the prescriptions filled at Wal-Mart pharmacies in the coming 12 months.

Since its introduction a year ago, the flat rate pricing program has proven to be wildly successful for Wal-Mart on several levels, Wal-Mart executives insist. It did earn a company subject to frequent criticism and organized opposition substantial favorable publicity that aligned with its corporate messaging around saving people money so they can live better. The program also benefited Wal-Mart’s bottom line, although Simon stopped short of quantifying the impact. He did reveal that the prescription count per day has increased dramatically, same store pharmacy sales have grown at a double digit rate since the program was implemented and that even at $4 Wal-Mart is making a profit on every drug in the program.

“We are making money and we are making more money than we did on our prescription drugs this time last year,” Simon said.

The combination of improved profits and lowered prices was made possible, Simon told media and analysts, because Wal-Mart was able to leverage what he characterized as inefficiencies in the supply chain in order to produce a winning formula for customers and the business. “If there was ever a supply chain that has inefficiencies this would be one of them,” Simon said of the health care system.

He also believes Wal-Mart’s estimate of the amount it has saved consumers understates the full impact on the health care system. That’s because the amount of savings was based on a straightforward calculation of the pricing differential between prices at which Wal-Mart sold drugs before and after the $4 program. Therefore, the figure doesn’t include the impact of competitors’ actions who lowered prices or matched the $4 program or hospital stays that were averted because people with heart disease or diabetes were able to afford medicines, he said.

While the newest changes to the $4 program are not as significant as the launch of the program last September, the prescription drug industry hasn’t heard the last from Wal-Mart as Simon vowed to, “continue to drive this segment until the tipping point is reached.”

Simon was the architect of the $4 program shortly after he joined Wal-Mart, but oversight of the pharmacy and other healthcare initiatives now fall to Dr. John Agwunobi who joined the company several months ago as sr. vp. for the professional services division after previously serving as assistant secretary for health with the U.S. Department of Health and Human Services.

“He will be leading this effort going forward and taking us to place that we never imagined we would go,” Simon said of Agwunobi. “Wal-Mart is going to impact the health care community and its customers in very dramatic ways as we move forward. We are only scratching the surface.”

In terms of the impact on its competitors, it is expected to be minimal, as many still regard the program as “media stunt” designed to steal headlines. “We continue to believe the Wal-Mart generic initiative is largely motivated by public relations, although the company maintains that the program is profitable,” noted William Blair securities analyst Mark Miller in a Sept. 27 research note. “We believe there is significant leverage on pharmacist staffing, so the marginal labor cost should be well below the average cost to fill—which is above $7 per prescription, in our estimation.”

Importantly, Miller believes the impact on Wal-Mart’s drug store competitors will be minor.

“Of the prescriptions for birth control dispensed at Walgreens—and similar figures likely apply at CVS—only 11% are cash-pay prescriptions that would be at risk, according to management,” he said. “Those customers at Walgreens [and] CVS with third-party coverage have co-pays generally well below $9 and thus would not have an incentive to switch to Wal-Mart.”