The Early Effects of Wal-Mart’s Move into Pharmacy Benefits Management

Industry leaders remained unruffled at Wal-Mart’s announcement that it plans to expand its pharmacy benefits program. The plan to expand prescription drug coverage for Wal-Mart employees and the employees of Wal-Mart’s supplier companies could mean big losses for other pharmacies, with the stocks of Wal-Mart’s four leading pharmacy competitors trading lower yesterday.

In a plan it labeled a cost-cutting measure, Wal-Mart announced plans to have company suppliers use Wal-Mart pharmacies for their employees’ prescription drugs. Wal-Mart’s expansion into pharmacy benefits is part of the company’s mounting efforts to break into the lucrative health care industry, and it seems that the retailer has decided to use its suppliers’ employees as the lab rats for its experiment.

Wal-Mart Drug-Benefit Move Isn’t Raising Big Alarms [Dow Jones via CNN Money]

Details of Wal-Mart Stores Inc.’s (WMT) plans to start managing employers’ drug benefits have yet to be filled in, and the move doesn’t appear to be rattling the giant discount retailer’s potential competitors and those who follow the pharmacy benefit management industry.

Wal-Mart’s chief executive told 7,000 store managers Wednesday that the company is starting a pilot program to help “select employers...manage how they process and pay prescription claims,” The Wall Street Journal reported. Wal-Mart Chief Executive Lee Scott said the company should be able to save employers $100 million this year by removing unnecessary costs.

Pharmacy benefit managers, or PBMs, contract with employers to handle prescription-drug claims for employees, negotiating discounts with drug stores and rebates with manufacturers. Two stand-alone PBMs - Medco Health Solutions Inc. (MHS) and Express Scripts Inc. (ESRX) - and the retail-PBM combination CVS Caremark Corp. (CVS) lead the industry.

The big three PBM industry leaders sounded relatively unfazed by Wal-Mart CEO Scott’s remarks to store managers.

Medco, in a statement, said Scott’s speech focused on social responsibility - ranging from installing windmills and solar panels on stores to working with the Chinese government on supplier certification - and made “a passing reference to improving health care for Wal-Mart employees and the suggestion of a pilot program to work with a small number of employers on processing prescription claims. No details were offered and it’s not our position to speculate.”

“We respect Wal-Mart as a provider in our retail pharmacy network,” Medco said. “We obviously monitor competitors and potential competitors closely. However, as the leader in a very competitive industry, we remain focused on our innovations.”

Medco’s therapeutic resource centers, staffed by pharmacists who specialize in certain diseases, provide “a capability no traditional retail pharmacy is capable of offering, and no other PBM has matched. We are comfortable with our leadership capabilities and our competitive positioning,” Medco said.

CVS Caremark Chief Financial Officer David Rickard said in a statement, “The pharmacy benefits management marketplace has always been extremely competitive. An additional entrant is unlikely to change the character of that.”

Express Scripts emphasized its role as a standalone PBM focused on providing access to low-cost drugs.

“Our clients and patients value working with Express Scripts because we are aligned with their interests and independent of retail pharmacies and drug manufacturers. We have consistently managed more generic prescriptions than any other leading PBM, now accounting for 62.2% of all prescriptions. We accomplish this one patient at a time, enabling better health and value at the consumer level,” the company said.

Wall Street analysts also downplayed the threat that a Wal-Mart PBM may pose.

JPMorgan analyst Lisa Gill said such a move by Wal-Mart has been discussed in the marketplace for months. In fact, she said, Wal-Mart has operated a relatively small PBM since 1989, WMS Prescription Drug Plans, and it covered some 300,000 individuals as of a year ago. Over the past year, however, Wal-Mart has more aggressively promoted its “revamped” PBM, including a transparent “ cost-plus” model, to the benefits consultant community, said Gill.

“Based on our conversations with consultants, the Wal-Mart model has not been widely embraced,” she wrote. The savings that the Wal-Mart PBM offers seems to be tied to the Wal-Mart stores, a far narrower network than the 40,000 chain and independent pharmacies included in the major PBM networks, according to Gill.

Wal-Mart lacks the purchasing clout that the big PBMs have with drug makers, and lags the big three PBMs in clinical offerings, she added.

Gill also noted that Wal-Mart’s 2006 step to offer generic prescriptions for $ 4 each didn’t hurt PBMs as many investors feared it would.

A Wal-Mart spokeswoman said the company wasn’t yet providing details of its plans for pharmacy-benefit management services.

Industry watchers already are waiting to see the effects of last year’s merger of the nation’s largest drug store chain, CVS, with major pharmacy benefit manager Caremark Rx. CVS has promised to introduce new products and services that marry the retail and PBM sides of its business to the benefit of consumers and employers.

Cowen & Co. analyst Kemp Dolliver said it will be hard for Wal-Mart to launch a PBM with significant impact, given the high contract-retention rates in the industry. “Building a PBM from scratch is an arduous process,” given typical three-year contracts and Wal-Mart’s need to spend years building credibility and adequate scale, that is, millions of individuals covered, to win large accounts, he wrote.

Oppenheimer analyst Charles Rhyee said Wal-Mart’s move is no cause for alarm. Wal-Mart’s offering would add another retailer behind CVS, Walgreen Co. (WAG) and Longs Drug Stores Corp. (LDG), he said in a note. Rhyee, who doesn’t cover the three retailers with PBMs, doubted the move would have a significant effect on Medco or Express Scripts.

Rhyee sees potential conflicts in retailer-PBM combinations and said he isn’t sure the CVS Caremark merger has proven to employers that such a business model is necessary or preferable.

Wal-Mart, CVS, Walgreen, Longs, Medco and Express Scripts shares all traded lower Thursday.

Posted by Alex Goldschmidt on Friday, January 25, 2008

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