Major drug store retailers recently blamed the increasing popularity of generic drugs for cutting into pharmacy sales, but the cheaper drugs are in fact boosting the companies' bottom lines.
That trend is likely to continue as even more generics enter the market in the next few years.
Drug retailers CVS Caremark Corp., Rite Aid Corp., Walgreen Co. and Longs Drug Stores Corp. reported November pharmacy same-store sales that on average fell below Wall Street expectations. The stores said increasing launches of generic versions of brand-name drugs hurt sales by about 4.5 percentage points.
But although the lower sale price of generics may affect retailers' sales, the cheaper drugs offer stores a wider margin than branded drugs. Generic drug makers have lower costs and expenses than their branded counterparts, who must cover high research and development and marketing expenses. As a result, generic makers can sell their drugs to retailers at lower prices.
Over the long-term, as blockbuster branded drugs such as Lipitor lose their patents and more customers switch to generics, drug stores' earnings are expected to benefit.
"Generic prescription drugs are a win-win for the health care system as a whole," said Chrissy Kopple, spokeswoman for the National Association of Chain Drug Stores. "They accounted for more than 50 percent of retail community pharmacy prescriptions in 2006 and they will continue to capture the market share."
A decline in reimbursement rates helps explain why generic introductions recently hurt drug store sales. When generic drugs first hit stores, reimbursement rates to the retailers are usually the highest. After about six months, however, more pharmaceutical companies start making the generic version and the competition lowers prices.
Simvastatin, the generic version of widely prescribed cholesterol drug Zocor, is one example. Drug stores saw a big benefit when the generic came out last summer, but reimbursement rates from insurance plans have since declined. In fact, Walgreen filled nearly three times the number of prescriptions for simvastatin during its latest fiscal fourth quarter as it did during the same period last year. But the company made roughly the same amount of money selling the drug.
Declining reimbursement rates actually forced Walgreen to last month pull out of four prescription insurance plans managed by drug retailer and pharmacy benefits manager CVS Caremark Corp.
CVS/Caremark, meanwhile, expressed optimism for the growing generics market.
"There is about $60 billion of branded drugs scheduled to go off patent between now and 2012, so that's good for our business," said CVS pharmacy spokesman Mike DeAngelis.
S&P senior equity analyst Joseph Agnese said the long-term benefits from generics are significant, even though the year-to-year comparisons are slowing a bit. Others agreed.
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