Daily Management Review

Heat Turned Up On Generic Drugmaker Deals By Wal-Mart, Walgreens, CVS


08/04/2017




Heat Turned Up On Generic Drugmaker Deals By Wal-Mart, Walgreens, CVS
Accelerating a decline in prices likely to affect drug companies for some time, more leverage when buying generic drugs is being leveraged by the largest U.S. retail pharmacies, including Wal-Mart Stores Inc and Walgreens Boots Alliance Inc., sources reportedly told the media.
 
The efforts from U.S. health regulators to speed approval of copycat drugs have been exacerbated by that pressure, sources also said. 
 
Earlier this week, warnings about generic price declines of as much as 9 percent through the end of the year were issued by wholesale drug distributors Cardinal Health Inc and AmerisourceBergen Corp, as well as top global generic drugmaker Teva Pharmaceutical Industries Ltd, which also indicated the extent of the shift.
 
A sell off in shares of generic manufacturers and distributors was prompted by the news.
 
Earlier this year, partnered with pharmacy benefit manager Express Scripts Holdings Co and formed a drug-buying partnership with AmerisourceBergen in 2013. More recently, Wal-Mart has joined with McKesson Corp to source generic drugs even as retailer CVS Health Corp had tied up with Cardinal Health earlier. The power of the alliances over negotiations is becoming clear, said industry analysts even though the alliances took some time to become effective.
 
"There's no question those guys are getting much better pricing and really squeezing the manufacturers on margins," said Gabelli & Co portfolio manager Jeff Jonas. "It's going to be a tough space for some time ... they are just going to keep playing the manufacturers off against each other."
Its partnership with Walgreens "helps enhance our ability to further drive down the cost of generics ... Scale matters and when you can negotiate on behalf of 83 million people,” said Express Scripts.
 
More than their partner wholesalers, whose revenue depends on a cut of the prices of the generic drugs they distribute, the alliances appear to benefit the retail pharmacies.
 
"Those distributors operate on a maybe 2 percent profit margin, so when your revenue drops, your 2 percent margin becomes a smaller dollar amount," Jonas said. "I think that maybe they underestimated how big of an impact that would be when they joined these groups."
 
Teva said it now expects prices to fall by a rate in the high single digits through the remainder of the year and it is awaiting the result of bids for a supply contract with Wal-Mart and McKesson. Its outlook for price erosion had worsened to 7 percent from 5 percent, Teva said in May.
 
Erosion of generic drug price at the high end of the 7 percent to 9 percent range it had previously forecast is seen by AmerisourceBergen.
 
"It is not at all clear whether the pricing environment will materially improve next year either," Jefferies analyst David Steinberg said in a note to clients.
 
After a series of steep price hikes for drugs long on the market in recent years, generic drugmakers have also come under greater scrutiny from U.S. consumers, lawmakers and regulators. In a mission endorsed by its new Commissioner Scott Gottlieb, in order to bring additional competing generic drugs to market and lower prices, the U.S. Food and Drug Administration began to clear a backlog of applications in 2015.
 
"There are good reasons to think the changes we are seeing are structural," Wells Fargo analyst David Maris wrote on Thursday, citing "larger retailing and wholesaling groups, a more efficient FDA, slowing generic drug penetration rates."
 
(Source:www.reuters.com) 






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