Walmart Starts Another Pharmacy Price War

Walmart has been conspicuously silent in recent months about its Health and Wellness initiatives. Where are the cost-plus direct-to-payer deals a la Caterpillar? Why not include more drugs in the $4 generic program? Where's the follow-through on "making price matter" for "commoditized" services?

Curiously, Walmart’s UK subsidiary ASDA just launched a new direct-to-consumer program for cancer drugs: 'Not for profit' pricing on all cancer treatment drugs.

The approach echoes Walmart’s U.S. direct-to-consumer $4 generic drug program, which set off a price war over here. So, will this move motivate Walmart’s U.S. colleagues to start shaking up the industry again?

As I see it, Walmart took advantage of excess generic margin in the U.S. pharmacy industry to launch a price war back in September 2006. Most non-pharmacy dependent retailers—supermarkets and other mass merchants—followed with competing programs, even if they lacked the acquisition cost and supply chain advantages of Walmart. The big 3 pharmacy chains eventually responded, although the chain programs are “members only” to avoid altering the chain’s Usual & Customary price.

Walmart’s strategy is not a “loss leader” or “bait and switch” trick. Prior to the $4 generic programs, Walmart pharmacies had slack capacity, suggesting that the incremental costs of dispensing were minimal. (See Sloppy reporting about Wal-Mart). The generic drugs chosen for Walmart’s program all had rock-bottom acquisition costs. Walmart also benefits from its direct purchasing relationship with generic manufacturers.

The discount generic programs offers significant value for uninsured and under insured consumers, who can now purchase certain generic drugs below the retail list price. These savings translate into lower pharmacy margins since the uninsured provide higher margins to a pharmacy. See Pharmacy Profits and Wal-Mart and Pharmacy Profits and the Uninsured.

The rationale for the British program appears to be similar, although ASDA attacks competitors by name in its announcement :

“Cancer is the UK’s second biggest killer and depending on where you live the only way to get certain key cancer drugs is to spend your savings on expensive private prescriptions – yet pharmacies are profiting by marking up some of these drugs by as much as 50%. An example: Lung disease is the biggest cancer killer of women in the UK – our new “not for profit” pricing means the lung cancer drug Iressa will now cost £2,167.71 at Asda. When we compared prices at other pharmacies we found the same drug cost £3,253.56 at Superdrug, £3,251.57 at Boots and £2,601.25 at Lloyds Pharmacy.”

U.K. newspapers are already writing about the Cancer Drugs Price War (The Daily Mail). Competitors Tesco and Sainsbury took the bait and will match prices with ASDA according to Tesco, Sainsbury To Match Asda On Private Cancer Drugs Pricing.

What do you think? Will Walmart rise again in the U.S.? Or are they going to spend all their time worrying about ice cream prices?