Walmart pharmacy store.
How’s Walmart’s Pharmacy business performance now? Wal-Mart Stores, Inc. (WMT) began offering drugs that were limitedly prescribed in 1978, and in 2006, pharmaceutical sales represented less than 10% of total revenue for the company. However, in the same year, Wal-Mart made an innovative plan to cut the cost of generic drugs to $4 per prescription. This changed the pharmaceutical business model and retail market for recipes significantly.
Direct impact, reducing the burden of Medicaid and creating a lifeline for people who cannot afford medicine. Prior to this change, retail pharmaceutical chains did not compete based on price, but this concept appealed to people without insurance who paid cash for their prescription drugs.
Starting modestly with around 300 generic drugs, Wal-Mart automates pharmacy distribution centers, reduces the amount of time medicines are expensive in warehouses than on store shelves, and gradually increases the drugs available in the program.
Wal-Mart was able to use its large size and retail expertise to grow into the world’s fourth largest retail pharmaceutical network with gross revenues, even though it was dwarfed by pharmaceutical benefit management companies such as Express Scripts, Inc., which prescribed drug plans for employers and insurance, and also by the largest retail chain made by mergers.
The company continued to delight Wall Street, generating a quarter of the quarter consistently increasing margins and net income, gaining praise from Peter Lynch in one of his books on investment. The pharmacy department is an important contributor to this giant, and Wal-Mart continues to set higher bars with plans for expanding pharmaceutical floor space, expecting higher profits, better margins and a greater role in the business of pharmaceutical benefit management. The result will please the company founder, the late Sam Walton, but then US law, called the Affordable Care Act (ACA) was passed, changing everything.
How Affordable Care Acts Throw a Key in the Wal-Mart Profit Margin Model
ACA, also known as Obamacare, was passed into law in 2010. This resulted in fewer uninsured Americans paying for prescriptions from the bag, which is a problem for Wal-Mart and other retail pharmaceutical chains.
For example, in Wal-Mart’s August 2015 revenue call, CFO Charles Holley talked about a new problem with the pharmaceutical business, first pointing to the reduction of replacement costs from pharmaceutical benefit managers that negatively impacted gross profit margins. Importantly, he mentioned the mixture was lower than high cash-margin transactions now that consumers are taking advantage of the larger coverage of prescription drugs. Consumers who pay retail cash prices pay more than private insurance companies reimburse drug chain costs, and Wal-Mart loses most of the profitable business with the passage of the ACA.
To get more customers in stores, companies also participate aggressively in selected pharmaceutical networks. Wal-Mart negotiates lower rates with insurance companies, and this adds more margin pressure if store visits do not result in more comprehensive sales.
Wal-Mart downgraded its 2015 full-year earnings per share (EPS) estimate to a range of $4.40 to $4.70 from $4.70 to $5.05. The new estimate covers 11 cents hit from unexpected lower pharmaceutical margins and several other “headwinds” that are not ready for the company to handle. The CFO also said the company expects to have margin pressure for the remainder of 2015 and possibly outside.
Another consequence of the ACA is a spate of mergers in the retail drug sector, because companies are forced to adjust to a new era of heavy government involvement in the industry. Chain retailers feel the need to streamline the cost structure to increase profit margins and, post-merger, this process involves closing overlapping store locations, reducing the number of employees and cutting double sales and administrative costs.
Walgreens Boots Alliance was formed after Walgreens bought $17 billion in Rite-Aid, placing it at the top of the retail drug chain in terms of annual income. Prior to that, CVS agreed to buy the Target pharmacy in a deal worth $1.9 billion.
Even though Wal-Mart maintains it has no plans to sell pharmacy businesses or acquire other assets, the giant retail pharmaceutical network formed through this merger will put increasing pressure on Wal-Mart to find new ways to squeeze better profit margins from its business in the shadows ACA. https://bit.ly/2UXkfmy