Priority on health care puts Wal-Mart in good shape

BENTONVILLE, ARK. —The prescription drug and health care marketplaces can expect Wal-Mart to be a disruptive force in the future with the company set to target the industry’s inefficiency and margin structure as a growth opportunity and a highly visible way to lend credibility to its “Save money, live better,” branding initiative.

The most recent evidence of this strategic direction came late last month when Wal-Mart announced an expansion of its $4 generic drug program. The flat rate pricing initiative roiled the prescription drug industry when it was launched last year. Since then, Wal-Mart contends it has saved Americans nearly $614 million by offering more than 330 prescription products at $4. The change, announced on Sept. 27, adds 24 new products and a new $9 pricing tier as three birth control and fertility products are now available.

The combination of the program entering its second year and the addition of new medicines will result in “massive” savings to consumers, according to Bill Simon, evp and coo of Wal-Mart, who alluded to the possibility of future pricing initiatives when he vowed to “continue to drive this segment until the tipping point is reached.”

Apparently, margins in the generic drug business are sufficiently plump that Wal-Mart can make further investments in price while achieving satisfactory profitability. “We are making more money than we made on our prescription drugs this time last year,” Simon said. “There was a massive amount of margin and a massive amount of inefficiencies in these products. Even at $4, we are very profitable on these items.”

The reduction in price has been offset by a surge in volume, Simon said, as average daily prescription volume has increased and monthly pharmacy same-store sales have grown at a double-digit rate every month since the program was launched. Products included in the program now account for 40% of all prescriptions dispensed at Wal-Mart. That figure is headed higher as the recent expansion of the program means products used to treat 95% of all therapeutic conditions are included, as well.

Despite Wal-Mart’s aggressive actions, leading drug chain competitors have continued to grow their businesses as well, although not at the rate Wal-Mart says it has seen.

Walgreens reported double-igit pharmacy comps in four of the past 10 months since Wal-Mart’s program launched, and experienced a 13.1% gain in January. CVS had one month in which its pharmacy comps nudged into double-digits with a 10.8% gain in December 2006, while Rite Aid’s peak pharmacy performance came in January with a 5.1% increase. Wal-Mart does not disclose monthly same-store sales by department.

Based on such results, it is unclear whether Wal-Mart is gaining share from drug chains, which means at least a portion of the growth is coming from expansion of the uninsured cash paying customer base, as well as altered prescriber behavior. “Physicians are more inclined to write a prescription for $4 they know will get filled and refilled and complied with, than they are to write a prescription for $200 that they know will never get filled,” Simon said.

As Wal-Mart moves toward the tipping point Simon referenced, it does so under new leadership with a new perspective. Three months ago, Dr. John Agwunobi, the former assistant secretary for health with the U.S. Department of Health and Human Services, took over as senior vp and president of Wal-Mart’s professional services division. Simon previously held the role and was the architect of the $4 initiative, but was given oversight of Wal-Mart’s U.S. stores division in a management shakeup earlier this year.

Agwunobi said he joined Wal-Mart because he wanted to be in a position where he could make a profound impact. “I think Wal-Mart is going to impact the health care community and its customers in a very dramatic way as we move forward,” he said. “With programs like the $4 prescription program and the potential for savings, we are really just scratching the surface.”

For a company whose station in the business world was achieved by emphasizing supply chain efficiency, the view of the health care landscape is one of inefficiency characterized by those who have a vested interest in maintaining the status quo, according to Simon.

“If there was ever a supply chain that had inefficiency, this would be one of them. And that is where the bulk of these savings are coming from,” Simon said.