In today’s column, Aaron Hill states that Wal-Mart should be praised for independently trying to make a dent in America’s health care crisis by offering generic prescription drugs for as little as $4.
He’s right. However, arguments have been raised in opposition to Wal-Mart not only because of the company’s questionable track record in terms of business ethics, but also because of concerns about how Wal-Mart’s decision will affect other drugstores, such as CVS and Walgreens.
Of course, “fair market” arguments – such as the idea that Wal-Mart should care a wit about the fate of its competitors – are flawed and do not stand up to the idea of a free market. The objections to Wal-Mart’s move, raised on behalf of other drugstores, are no different.
When Wal-Mart’s plan was announced, shares of CVS and Walgreens both dropped. This was “an overreaction,” according to a research note written by Merrill Lynch analyst Patricia Baker. Wal-Mart’s plan only covers 291 drugs, a small percentage of the total number of drugs sold at stores such as CVS and Walgreens. And the fact is that the drugs Wal-Mart intends to sell for such low prices were cheap in the first place. These drugs were “low priced, low profit and low co-payment already,” according to Andrew Wolf, an analyst with BB&T Capital.
There is no reason why CVS and Walgreens can’t survive this. Generic drugs are cheaper for the businesses that sell them and provide more profit per sale than more costly brand-name drugs, which are tightly controlled by the major pharmaceutical companies that produce them. But Baker went on to say that less affluent customers who pay with cash would be the most likely buyers of Wal-Mart’s discount generic drugs, and those customers are only a small fraction of the business drugstores receive.
This is a perfect time to buy up the stock of the companies that Wal-Mart is mistakenly expected to crush. CVS and Walgreens stocks have been undervalued due to a mistaken idea that Wal-Mart’s new plan will affect them in some massive way. Just ask Stephen Chick, an analyst with J.P. Morgan who besmirched Wal-Mart’s stock by downgrading it to “neutral.”
Or ask John Heinbrockel of Goldman Sachs, who said “We strongly believe that Wal-Mart’s strategy sounds worse (for competitors) than it really is.”
After all, there can be no more effective tool to show justified discontent with Wal-Mart’s past ethical violations than by buying up the stock of its competitors.