What’s good for consumers with high cholesterol proved not to be so good for the nation’s largest drugstore chain last week.
Perhaps the biggest reason Walgreen Co.’s stock tanked came thanks to profits from generic versions of Zocor, a cholesterol drug used by millions of Americans to lower LDL, the “bad” cholesterol. Walgreens shares on Monday fell 15 percent, or $7.08, from the Sept. 28 close, to $40.16, the biggest drop in 27 years.
The news was hard medicine to take for analysts and investors because Deerfield-based Walgreens is known for making lots of money from generic drugs. Its pharmacists encourage customers to switch to them from expensive brand-name drugs. Insurers also push for generics to save money. This has helped Walgreens increase profits quarter after quarter.
The retailer’s profit decline opened a rare window into the importance of generics to Walgreens’ bottom line and to the massive clout insurers and drug-benefit firms have these days. Zocor was a huge seller as a brand, racking up sales of more than $4 billion in 2005, its last full year without a generic rival. That made it the biggest selling drug to convert to generic in Walgreens’ history. Generic copies became available at the end of June 2006.That was good news for consumers. And for a time, it also was very good news for Walgreens.
In the early months of a generic’s debut, Walgreens piles up revenues. That’s because insurers force consumers to switch to the generic from other brands, in this case not only from Zocor but from Lipitor and Crestor.
The revenue then tapers off, however, as more generic versions enter the market and insurers press drugmakers to reduce pricing even more.
That’s exactly what happened earlier this year, as multiple manufacturers began selling generic copies and Walgreens was forced to accept lower payments from insurance companies and pharmacy-benefit companies who pay the pharmacy chain to fill prescriptions.
The magnitude of the pricing changes was stark. Walgreens made up to $60 in gross profits per prescription of generic Zocor last year after paying the manufacturer, estimates Derek Leckow, an analyst with Barrington Research Associates. But that fell to about $20 per prescription in the fiscal fourth quarter, ended Aug. 31.
The full impact of generic price drops, the bulk of which came from Zocor, cost Walgreens “between $40 million and $60 million in lost gross profit,” the company said. Normally when a generic loses its edge, Walgreens relies on other maiden generics to pump up revenues. But the void left in Zocor’s wake was too huge to offset.
“Something this big in generic drugs has never happened and something this detrimental to Walgreens earnings has never happened,” Leckow said.
At the same time, private insurers were pressuring to reduce pricing.
“We use enormous purchasing scale to drive big discounts from drugmakers,” said Mark Merritt, chief executive of the Pharmaceutical Care Management Association, a Washington-based lobby that represents the pharmacy-benefit management industry — companies such as Medco Health Solutions Inc. and Express Scripts Inc.
That, in turn, puts pressure on Walgreens.
“Because the manufacturer’s price dropped, the reimbursement we get from insurance companies also dropped,” Walgreens spokesman Michael Polzin said.
Meanwhile, the sales volume of generic Zocor, also known as simvastatin, tripled in Walgreens’ fiscal fourth quarter, the company said. Yet gross profits were flat compared with the year earlier period when the first Zocor generic became available and insurance reimbursement was higher.
Moreover, the additional sales translated to additional expenses for Walgreens.
“You have your added cost of your pharmacy staff filling all of these prescriptions, and you are not getting any profit dollars from it,” Polzin said.
In the fourth quarter, Walgreens’ costs of selling, occupancy and administration, which include filling prescriptions, jumped 15 percent to $3.15 billion from $2.73 billion. The undisclosed extra costs in staff and related costs to fill prescriptions came on top of Walgreens already aggressive store expansion (opening a new store every 16 hours) and investments in opening retail clinics in more stores. So, fourth-quarter earnings dropped to $396.5 million, or 40 cents a share, well below the 47-cent consensus estimate of analysts.
But Walgreens still makes more money selling the generic than Zocor because of the lower margins on brands. “Even with this year’s lower simvastatin reimbursements, we’re still better off dispensing it than the brand-name Zocor,” Polzin said.
And analysts say Walgreens’ hiring spree at the pharmacy counter should make the company better prepared to deal with generic conversions in the future.
In a statement last week, Walgreens Chairman Jeffrey Rein vowed to “fix this and, at the same time, continue our aggressive growth plan.”
“Managing both expenses and lower reimbursements on some generic drugs is my top priority,” Rein added.
Asthma treatment Advair is slated to come off patent next year, followed in 2009 by the diabetes pill Avandia and Flomax, a treatment for enlarged prostate. Neither of those drugs, however, are top sellers like Zocor.
Still, the prospect of a mega-blockbuster forcing Walgreens to spend more on filling prescriptions looms.
In 2010, for example, Pfizer Inc.’s Lipitor, another statin cholesterol drug is expected to lose patent protection. The world’s top-selling drug, Lipitor, generated nearly $9 billion in U.S. sales last year.
But Barrington Research’s Leckow does not believe the situation will repeat itself at Walgreens for Lipitor because that drug is already losing market share because it is in the same class of cholesterol drugs as Zocor. Therefore, there might not be as many customers switching to a generic Lipitor as with Zocor, he reasons, because they are already moving away from Lipitor.
“Some people might want to say this is a trend but I disagree with that,” Leckow said.
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bjapsen@tribune.com
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How generic drugs are priced
The first generic version of a brand-name drug enjoys six months of exclusivity, based on government rules. When there is only one generic, it is generally priced at 94 percent of the brand-name drug, according to the Food and Drug Administration. When a second generic enters the market, the price usually falls to 52 percent of the brand-name price, the FDA says.
After that, multiple generic drugmakers begin selling copies and prices fall dramatically. This allows insurers to pay less for the drugs and cuts into pharmacies’ profits.
In Zocor’s case, the drug retails for about $3 a pill, or $150 monthly, while the generic sells for about $2 a pill, or $65 monthly.
— Bruce Japsen
