Wal-Mart Stores Inc. and pharmaceutical distributor McKesson Corp. plan to use their "size and scale" in collaborative efforts to lower the purchasing price of generic medications.
The world's largest retailer announced Monday a sourcing agreement with McKesson, the largest distributor of pharmaceutical drugs in the U.S., according to Fortune magazine. Wal-Mart also announced the extension of a long-term distribution agreement with McKesson.
Wal-Mart declined to disclose details of the partnership, but George Riedl, a Wal-Mart senior vice president and president of its U.S. health and wellness operations, said in a statement that the companies are expanding their longtime relationship in order to "drive efficiencies" in the generic pharmaceutical market.
"So, basically, they're going to use their combined scale to get better drug deals," Edward Jones retail analyst Brian Yarbrough said. "I'm not saying Wal-Mart won't pass some of that on to the consumer, but some will probably stay in their pockets. They're looking for any ways to improve costs outside of taking labor out of the stores, and this is another way."
The agreement is expected to expand Wal-Mart's relationship with McKesson, which reported $190.9 billion in revenue in fiscal 2016, ranking 11th on the Fortune 500 list of top U.S. companies by revenue. Wal-Mart ranks first.
Wal-Mart spokesman Molly Blakeman said the two companies have worked together to source generic pharmaceuticals for years, but the previous partnership was on a much smaller scale.
Wal-Mart's agreement with McKesson comes after the retailer disclosed last August that its profits for fiscal 2016 were affected by pharmacy pressures. Some of the challenges included lower reimbursement rates from insurance companies, higher costs and a decrease in cash purchases.
Wal-Mart did not provide details at the time, but executives said the pharmacy business remained a growth area for the company. Blakeman said the retailer does not "foresee a change in the pricing of generic drugs," but she contended that the collaboration with McKesson will help Wal-Mart be more efficient and ultimately lower the cost of health care.
"It's the right thing to do for our customers. It's the right thing to do for our business," Blakeman said. "We've built a strong relationship with McKesson over the past 30 years and as we continue to be a large, but nimble retailer, we're working with the right partners and the right vendors and suppliers to ensure that we're running a really smart business."
Wal-Mart is the fourth-largest pharmacy in the U.S. with an estimated $19.9 billion a year in prescription revenue in 2015, according to DrugChannels.net. The retailer trails CVS Health Corp. ($83.2 billion), Walgreens ($54.4 billion) and Express Scripts Inc. ($40.1 billion).
It's not clear what portion of the retailer's revenue comes from generic drugs. But according to data from the Generic Pharmaceutical Association, 88 percent of the prescriptions dispensed in the U.S. in 2014 were generic drugs, and they accounted for only 28 percent of total drug spending. According to the association, generic drugs saved health care systems $254 billion in 2014.
Wal-Mart offers certain generic drugs for $4, but Blakeman said the collaboration with McKesson involves generics across the board. Mark Walchirk, president of McKesson's U.S. business, said in a statement that the companies have had an "ongoing dialogue" about how they could work together to bring more efficiency and the sourcing partnership makes strategic sense for both.
Carol Spieckerman, president of Spieckerman Retail, believes the relationship will help Wal-Mart stay on top of the "fast-moving dynamics in generic drug management."
"Wal-Mart's continuation and expansion of its relationship with McKesson is a great example of how Wal-Mart and other retailers are embracing outside partnerships and expertise, particularly in complex businesses such as pharmacy," Spieckerman said. "The relationship is by no means exclusive -- McKesson has also contracted with Target and Target's pharmacy partner, CVS, for example. However, these relationships only enhance the scale-building and cost-saving benefits that McKesson brings to the table."
Business on 05/17/2016