Generic Zocor Hits $5 per Month

With very little notice by the press, Kmart Corporation became the first discounter to add simvastatin (the generic form of Zocor®) to its discount generic program at $15 for 3 months. See Kmart Expands 90-Day Generic Program to Cover Additional Drug Offerings.

To be honest, I’m surprised that Wal-Mart Stores Inc (NYSE:WMT) has not added simvastatin to its discount list yet. I suspect that they are waiting for a more auspicious time to announce the move, such as when the news about Part D direct negotiations dies down. I predicted this move in November, so perhaps I’ll just keep repeating it until the prediction comes true.

Wal-Mart’s Real Impact

I still maintain that Wal-Mart's $4 generic program will hurt supermarkets, independents, and other discounters more than major chains such as CVS Corp (CVS) or Walgreens (NYSE WAG). The chains compete on convenience and service, so they are much less vulnerable because customers with third-party insurance do not save much versus standard co-pays.

Thus, I find Kmart’s move even more surprising since other discounters and mass merchants are backing off. Costco Wholesale Corp (NASDAQ:COST) ended its $4 drug plan in December while BJ’s Wholesale Club (NYSE:BJ) announced its exit from the pharmacy business.

Generic Sourcing Models

The generic economics of companies like Costco and BJ’s are not comparable to Wal-Mart. There are at least two reasons that Costco can not source generics as cheaply as Wal-Mart.

• Lower volumes -- Rx sales at Wal-Mart are more than 10 times sales at Costco, while BJ’s had less than $60 million in total Rx sales.
• Wholesaler margin -- Costco buys generics through a wholesaler (McKesson Corp). Wal-Mart buys generics directly from the manufacturer, just like the larger chains and PBM mail order operations.

Even so, Wal-Mart does not necessarily get the best price on generics. Wal-Mart buys lower volumes of generics than the big 3 wholesalers -- AmerisourceBergen Corp (NYSE:ABC), Cardinal Health Inc (NYSE:CAH), and McKesson Corp (NYSE:MCK), McKesson Corp – and lower volumes than the large chains -- CVS Corp (NYSE:CVS) and Walgreens (NYSE:WAG).

Nevertheless, Wal-Mart’s product acquisition costs are still lower than the independents and supermarkets that buy through wholesalers. I also estimate that Wal-Mart has been able to add the incremental pharmacy volume with little incremental dispensing costs. (See my analysis from December: Sloppy reporting about Wal-Mart).

What’s Next?

I think Wal-Mart has a much larger plan to take pharmacy market share away from supermarkets and independents. Check out their new Neighborhood Market store design – it looks like a pharmacy chain to me, not a big box. (Unfortunately, I no longer have a need for the "celebrity hairstylist" who was there to celebrate the new store design.)

Stay tuned for Wal-Mart’s announcement of simvastatin!