US drugstore chains may withstand Wal-Mart plan

CHICAGO: WAL-Mart Stores’ plan to sell some generic drugs for just $4 should not impact leading US drugstores Walgreen and CVS as much as initially feared, according to analysts. The plan, which starts in the Tampa, Florida area on Friday,

“caused an overreaction” in Walgreen and CVS shares, Merrill Lynch analyst Patricia Baker wrote in a research note. The action covers 291 drugs, a small fraction of the thousands of generic drugs sold at pharmacies. “The drugs on Wal-Mart’s list are low-priced, low-profit, and low co-payment already,” BB&T Capital Markets analyst Andrew Wolf said. Target, the No. 2 US discount retail chain, quickly matched Wal-Mart’s pricing in the Tampa market.

Several analysts called the pullback a buying opportunity. “We strongly believe that Wal-Mart’s strategy sounds worse than it really is,” said John Heinbockel, who covers drugstores for Goldman Sachs. Although generic medicines are cheaper, they are more profitable for pharmacies since the prices of branded drugs are tightly controlled by the major drug companies that manufacture and sell them. Not everyone on Wall Street was bullish. JP Morgan analyst Stephen Chick downgraded Walgreen to “neutral” from “overweight”. “This seems like a longer-term threat that extends beyond mere cash prescriptions,” he told clients in a note.

BB&T’s Wolf said that if Wal-Mart were to discount other generics, it would likely have a major impact on the profitability of drugstores. However, we consider this unlikely, since it would also impact Wal-Mart earnings negatively, which yesterday’s pricing move likely did not. Baker said that customers who pay with cash, rather than through insurance, seem to be the most likely users of such a plan, and represent a small fraction of the chains’ customers.