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In September, Wal-Mart cut prices of the generic drugs it was selling to consumers to $4. The marketing coup caused other retailers like Target to announce discount programs of their own.

But now some big employers, seeking spoils for their workers similar to those that have spilled onto the laps of consumers, are asking for similar discounts, according to one consultant.

The price cut announced by Wal-Mart is great news for employers, but less so for the pharmacy benefit managers, which Kaplan expects will "lose some market share, or some margin at least on the generics." The market has already responded, with the November announcement that retailer CVS would buy pharmacy benefits manager Caremark Rx, in a deal valued at more than $21 billion.

Stuart Clark, executive vice president of Comprehensive Health Services, a Virginia-based service that manages clinics on behalf of major corporations, called the discounting "disruptive in a positive manner."

It has forever changed the model of distributing prescription generics.

Whether Wal-Mart is still making a profit by dropping prices to $4 is not clear, as it costs a pharmacy about $4 just to fill a prescription. But because Wal-Mart is so large, they can probably maintain this strategy for the near future, at least for some prescription drugs, Kaplan said.

A year or two of losses on generic prescriptions costs might be made up with more people shopping for other higher-margin drugs at the retailer. Or the retailer might choose to "creep the price up" in a year or two, said Kaplan.

"If people go to the store to get one drug and many people are taking six or seven drugs a month, they are getting all their scripts filled and so there may be margins on the other medications that they are looking forward to," Kaplan said.

He also said this aggressive price discounting would not be likely in the brand drug world "unless something happens with how the industry sets prices for brand drugs."

In the generic prescription drug world, dozens of manufacturers are competing to have their product displayed on store shelves. With brand-name drugs, a patented, controlled environment in which manufacturers own the drug means makers don't have to compete on price.

"Over time you should see a little bit of competition on branded drugs, but not like generics where there's 20 people making the same chemically equivalent product," said Kaplan.

December 1, 2006

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