U.S. retailers, including Wal-Mart Stores Inc., are seeking a prescription to cure ailing margins in their pharmacy business.
Lower reimbursement rates from insurance companies, higher costs and a decrease in cash purchases are cutting into profits, even as prescription drug sales increase for many retailers. Wal-Mart reported during Tuesday's second-quarter earnings call that pharmacy pressures likely will affect its bottom line for the remainder of the year.
Wal-Mart, which operates 4,500 pharmacies in the U.S., offered no specifics on the financial impact, but the company did disclose that a combination of pharmacy margin pressures and costs related to the shrinkage -- missing, stolen or damaged merchandise -- will cost the company about 11 cents per share for its current fiscal year. Earnings per share were down about 3 cents per share in the second quarter because of the merchandise and pharmacy issues.
Earnings per share guidance for the year was lowered by Wal-Mart to between $4.40 to $4.70. It previously forecast earnings per share at between $4.70 to $5.05.
"It's definitely not unique to Wal-Mart," Stephens Inc. retail analyst Ben Bienvenu said. "You're seeing anyone that has exposure to pharmacy is feeling this external issue, and it's very difficult to control. Wal-Mart probably has better means of controlling it than others, but it's industrywide."
Fred's, a publicly traded discount store franchise headquartered in Memphis, reported a nearly 4 percent decrease in gross profit for the first quarter that is largely attributed to "ongoing pharmacy department margins." The decrease was driven "by lagging reimbursement rates, the cost of participating in Medicare Part D preferred networks and continued generic pharmaceutical inflation," the company reported in June.
A $1.1 billion miscalculation related to prescription drug margins led to the departure of two Walgreen executives in 2014. Target Corp. announced in June that it would sell its 1,600-store pharmacy division to CVS Health Corp.
Despite the struggles, which Wal-Mart U.S. CEO Greg Foran and Chief Financial Officer Charles Holley expect to continue into the next fiscal year, pharmacy remains a growth area for the company. Health and wellness -- which includes pharmacy, vision and over-the-counter medicine sales -- made up about 11 percent of Wal-Mart U.S. business for the year. That's up from around 10 percent in 2014, and the retailer continues to look for ways to expand its health and wellness operations.
DrugChannels.net ranks Wal-Mart as the fourth-largest retail pharmacy in the U.S. with $18.8 billion per year in prescription revenue. CVS ($47.1 billion), Walgreen Co. ($49.4 billion) and Express Scripts Inc. ($38.1 billion) are first through third in rankings that were compiled before the CVS-Target deal.
Wal-Mart executives said during Tuesday's earnings call that the retailer's pharmacy business continues to grow. Spokesman Randy Hargrove reiterated the retailer's commitment to its health and wellness operations Wednesday.
"We made the decision to run our own pharmacy, and we think it's the right decision for our business and our shareholders," Hargrove said. He added that the company would continue offering $4 generic prescriptions, although many retailers currently are seeing margins shrink because of the rising costs of drugs that aren't name brands.
Because of its size and scale Wal-Mart often is on the winning side of fights with suppliers or others who do business with the retailer. Insurance companies, at least for now, are presenting a unique challenge for Wal-Mart.
The retailer is looking for ways to reduce costs associated with suppliers, asking for cuts in marketing and advertising budgets. Commanding similar breaks from health insurance companies will be a more challenging endeavor for Wal-Mart, said Morningstar analyst Ken Perkins.
"Because of the system, I don't know that they'll be able to have the influence over insurance companies you might typically see them have on others," Perkins said. "Insurance companies are generally going to have more leverage here. If they say they're only going to reimburse two-thirds the price of a drug, there's not a whole lot that can be done."
Holley said the retailer is working to find ways to get its pharmacy costs down. Still, the pressures are expected to continue at least until fiscal 2017 year begins in February.
"We do feel like that drag will continue for this year," Holley said. "But, as usual in the Wal-Mart way, we'll continue to work with our partners on how we bring costs down. But we do see that drag, and it's reflected in our guidance for the balance of the year."
Business on 08/20/2015