Wal-Mart,
Walgreens, CVS turn up the heat on generic drugmaker
deals
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[August 04, 2017] By
Deena Beasley
(Reuters) - The
largest U.S. retail pharmacies, including Wal-Mart Stores Inc and
Walgreens Boots Alliance Inc, are wielding more leverage when buying
generic drugs, accelerating a decline in prices likely to affect drug
companies for some time, industry experts said on Thursday.
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That pressure is exacerbated by efforts from U.S. health regulators
to speed approval of copycat drugs, industry sources said.
The extent of the shift became clearer this week, when wholesale
drug distributors Cardinal Health Inc and AmerisourceBergen Corp, as
well as top global generic drugmaker Teva Pharmaceutical Industries
Ltd, warned of generic price declines of as much as 9 percent
through the end of the year.
The news prompted a sell off in shares of generic manufacturers and
distributors. On Thursday, Teva fell 24 percent, while rival Mylan
NV dropped 6 percent and AmerisourceBergen fell 10 percent.
Drugmakers Perrigo Co Plc and Endo International Plc fell 5 percent
and 6 percent, respectively. Since Thursday, Cardinal Health has
dropped 10 percent.
Walgreens formed a drug-buying partnership with AmerisourceBergen in
2013, and earlier this year partnered with pharmacy benefit manager
Express Scripts Holdings Co. Retailer CVS Health Corp has tied up
with Cardinal Health and, more recently, Wal-Mart has joined with
McKesson Corp to source generic drugs. Industry analysts said the
alliances took some time to become effective, but their power over
negotiations is becoming clear.
"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."
Express Scripts, in an emailed statement, said 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."
The alliances appear to benefit the retail pharmacies more than
their partner wholesalers, whose revenue depends on a cut of the
prices of the generic drugs they distribute.
"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."
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Teva said it is awaiting the result of bids for a supply contract
with Wal-Mart and McKesson, and that it now expects prices to fall
by a rate in the high single digits through the remainder of the
year. In May, Teva said its outlook for price erosion had worsened
to 7 percent from 5 percent.
AmerisourceBergen sees generic drug price erosion at the high end of
the 7 percent to 9 percent range it had previously forecast.
"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.
Generic drugmakers have also come under greater scrutiny from U.S.
consumers, lawmakers and regulators after a series of steep price
hikes for drugs long on the market in recent years. The U.S. Food
and Drug Administration began in 2015 to clear a backlog of
applications to bring additional competing generic drugs to market
and lower prices, a mission endorsed by its new Commissioner Scott
Gottlieb.
"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."
(Reporting by Deena Beasley; additional reporting by Michael Erman;
editing by Michele Gershberg and Grant McCool)
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