Wal-Mart Stores Inc. (NYSE:WMT) has already demonstrated its ability to leverage its power to cut the prices of goods it sells. “The New York Times” reports today that Wal-Mart appears ready to use “its unrivaled influence in the American economy to lower the cost of health care for its customers.”
“The New York Times” writes that in a trial program, Wal-Mart will sell generic versions of about 300 widely prescribed drugs for as low as $4. On average, generic drugs cost between $10 and $30 for a 30-day prescription. The trial will begin in the Tampa, Florida, area, and, depending on consumer response, may expand the program around the state and the country.
It is not yet clear how Wal-Mart will absorb the cost of reducing the cost of generic drugs. Will it bear the cost itself, or force the hand of the pharmaceutical companies?
Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA), the world’s largest generic drug maker, could be affected by Wal-Mart’s move. What do the analysts say?
Poalim IBI analyst Elah Alkalay says, “Wal-Mart’s public relations could affect the share.” She adds that shares of generic drug makers will probably fall, even though Wal-Mart’s move will have only a media impact.
Clal Finance Batucha analyst Yisca Erez believes that Wal-Mart’s move is bad news for Teva, and that it will create negative sentiment for the share, demonstrating the sensitivity of the market and generic drug shares to announcements of this kind, despite good quarterly financials.
Erez added, “It’s hard to assess the impact at this stage because it is not clear who will bear the cost of the cost-cutting. Will it be Wal-Mart or the generic drug makers? Also, will Wal-Mart’s experiment spread beyond Florida? Will other retail chains follow suit and cut prices?”
Leader & Co. analyst Uri Hershkovitz says Wal-Mart accounts for no more than 5% of Teva’s profits, and that profit margins in this market are low. “Generic drug companies make very low profits on ordinary generic drugs, those are not niche drugs. Therefore, the burden may ultimately fall on Wal-Mart, not the generic drug companies.”
Alkalay and Hershvoitz favorably note that the US Food and Drug Administration (FDA) has granted fast-track approval of Cladribine, an oral treatment for multiple sclerosis, jointly developed by Teva subsidiary Ivax Corp. and Serono SA (NYSE: SRA; SWX: SEO)
Published by Globes [online], Israel business news - www.globes.co.il - on September 21, 2006
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