Stocks Head South on Wal-Mart's Announcement

Wal-Mart Stores Inc., the retail behemoth, announced on Thursday that it will slash prices on nearly 300 generic drugs and begin selling these for $4 per 30-day supply. The announcement led to a fall in the shares of leading retail pharmacies, pharmacy benefit managers, generic drug makers and pharmaceutical wholesalers.

The biggest losers on the New York Stock Exchange were the four U.S. drugstore chains: CVS Corp., Walgreen Co., Rite Aid Corp. and Longs Drug Stores Corp., which derive the majority of their total sales from prescriptions. Shares of CVS Corp. fell 9.3 percent, while Walgreen Co. fell 5.9 percent, Rite Aid Corp. fell 4.8 percent and Longs Drug Stores Corp. fell 4.6 percent.

Scott Vergin, a portfolio manager with Thrivent Financial in Minneapolis, said, "It's a matter of sell and ask questions later…..When Wal-Mart does something big, that takes the stocks down. People panic."

To begin with Wal-Mart would cut prices in the Tampa, Florida area and then expand the plan to rest of Florida and to other states next year. The program would be available to customers and associates of Wal-Mart pharmacies in the Tampa Bay, Florida area starting on Friday.

Patricia Edwards, a Seattle-based money manager at Wentworth, Hauser & Violich opined that the plan may help attract more customers who otherwise may not have shopped at Wal-Mart.

Wal-Mart is cutting drug prices at a time when health-care costs are soaring and a record number of Americans don't have insurance. The move could cause a price war, which would erode margins. Richard Hastings, analyst at Bernard Sands said,"The big chain drug companies, Walgreen, CVS and Rite Aid, will be able to respond but smaller prescription drug buyers, including certain supermarket chains that offer pharmacy services, will see some margin erosion if they are forced to compete on price.”

All said and done, the prospects of Wal-Mart stealing traffic from drugstore chains due to this move are very bright.