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Commentary

The New Drug Wars
Tom Van Riper, Forbes, 11-2-06

Van Riper discusses how Wal–Mart's $4 generic drug program is sending shockwaves throughout the pharmacy industry, and driving competitors to lower prices.

The rules of the drug war may be rapidly changing, with major pharmaceutical chains scrambling to play catch–up.

That's what happens when a company with the power of Wal–Mart (nyse: WMT—news—people ) decides to turn a piece of the generic prescription drug business into one of the world's greatest marketing campaigns.

Trying to make nice with urban politicians and to increase store traffic during midweek daytime hours, the retail behemoth announced a new plan last month to offer a host of generic drugs at $4 a prescription. It's only a small piece of Wal–Mart's pie, but the move may well force traditional drug chains like CVS (nyse: CVS—news—people ), Walgreen (nyse: WAG—news—people ) and Duane Reade to get in on the price war.

CVS became the first to make a bold move toward bulking up its pricing power, snapping up drug distributor Caremark Rx (nyse: CMX—news—people ) for $21.3 billion in what the companies are calling a "merger of equals."

Caremark CEO Mac Crawford called the deal a "powerful force for change in pharmacy services," describing the synergistic benefits as "high quality and "cost effective."

...

With about three–quarters of its annual revenue coming from its pharmacy business, CVS, along with its rivals, could indeed feel a squeeze as Wal–Mart gradually expands the $4 generic drug policy it began in Florida last month.

"Absolutely," says retail expert Brit Beemer of America's Research Group. "You could be talking about $40 versus $16 for four prescriptions a month," a significant amount for seniors on fixed incomes, who represent a big part of the generic drug customer base.

Many of the drugs covered by Wal–Mart's $4 program ordinarily retail for $10 to $12 a prescription. So don't be too surprised to see more deals between drug chains and distributors as the industry looks to offer prescriptions more cheaply.

Assuming it goes through, the merger would roughly double CVS's market cap to over $45 billion. Merging with the middle man could give CVS an avenue to acquire prescription drugs more cheaply, enabling it to lower prices to consumers in the wake of Wal–Mart's move. Nashville, Tenn.–based Caremark, with 60,000 pharmacies around the country, is a distributor that acts as an intermediary between pharmaceutical firms and drug store chains. The company, which handles prescription coverage for many big corporations and unions, has a lot of influence over pricing.



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