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Walmart, Fred’s cite Rx headwinds for profit squeeze

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NEW YORK — The world’s biggest retailer and a regional discount chain have attributed pressure on profits to trends in the prescription drug business.

Foran_Greg_Walmart US CEO_headshot

Greg Foran, Walmart

Walmart and Memphis, Tenn.-based Fred’s Inc. said lower pharmacy margins had eaten into second quarter earnings and pointed to lower reimbursements and a drop in cash customers as a result of people gaining health insurance under the Affordable Care Act.

“Let’s talk about pharmacy,” Walmart U.S. president and chief executive officer Greg Foran said during a conference call. “Reflecting industrywide trends, we are seeing reduced reimbursement rates from pharmacy benefit managers, which is negatively impacting gross margin. We are also seeing a lower mix of higher-margin cash transactions, reflecting a marketplace shift in which more customers are now benefiting from greater drug insurance coverage. While we are taking a number of actions to lessen the impact, we expect to have pressure on pharmacy for the rest of the fiscal year.”

Walmart factored in an 11 cents-per-share hit from reduced pharmacy margins in lowering its full-year earnings-per-share forecast to a range of $4.40 to $4.70, from $4.70 to $5.05.

The company reported that its health and wellness business is growing, with script counts increasing. Analysts said the discount store giant may have been hit with lower reimbursement rates in contract negotiations with a major pharmacy benefits manager. Walmart’s estimated annual pharmacy revenue of $24 billion makes it the No. 3 prescription provider in the country, but the top three PBMs’ management of 70% of all scripts may still give them leverage over it.

Freds Pharmacy sign_featuredAdam Fein, president of Pembroke Consulting and CEO of Drug Channels Institute, told The Washington Post that Walmart’s struggles are being seen across the pharmacy industry, which remains profitable even with margins ­dropping. He said Walmart’s $4 price on hundreds of generic prescriptions may have left it particularly vulnerable. It has many more cash customers than the average chain, and as they obtained health care coverage, insurers decided in some cases to pay less than what Walmart was getting, Fein told the Post.

Also, Walmart participates in preferred pharmacy networks, in which pharmacies agree to cut drug prices charged to insurers in order to bring in more customers. The increase in store visits may not be as profitable as hoped, Fein said.

Fred’s CEO Jerry Shore blamed “developing headwinds in the pharmacy industry” for a $4.9 million loss in the second quarter — the retailer’s fifth straight quarter in the red.

“The industrywide issues include continued pressure on reimbursement rates; increasing regulation of controlled substances, which proportionately affects our Southeast region more than other parts of the country; and a greater uninsured population due to lower-than-average participation in available health insurance alternatives,” Shore said.

Recognizing that these pressures will continue, Shore noted that Fred’s early this year engaged A.T. Kearney to work on bringing about “rapid change” in its pharmacy operation.

“With the first phase completed by both internal resources and A.T. ­Kearney, the team now has initiatives in place to strengthen profitability in our pharmacy business,” he said. “These initiatives include rolling out new pharmacy marketing programs to drive new customers and reducing cost-to-fill through a targeted labor optimization model and an aggressive expense control program.”


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