Wal-Mart announced a potentially revolutionary change to the marketing and pricing of generic drugs - I get that. But when I looked at investors’ reactions to this whole thing, I had to ask myself “What drugs are they taking?” It seemed to me that the market overreacted. So I decided to take a look at three leading companies in the three industries most affected by Wal-Mart’s announcement and the one-day financial impact was:

Retail: Drug Stores
CVS lost 8.4% and $2.4 Billion of market cap
RAD lost 5.0% and $127 Million of market cap
WAG lost 7.3% and $3.7 Billion of market cap

Wholesale Drug Distribution
ABC lost 4.3% and $399 Million of market cap
CAH lost 2.4% and $681 Million of market cap
MCK lost 1.8% and $296 Million of market cap

Pharmacy Services
CMX lost 4.3% and $1.09 Billion of market cap
ESRX lost 3.5% and $401 Million of market cap
MHS lost 3.8% and $708 Million of market cap

Meanwhile….
WMT lost 0.8% and $1.7 Billion of market cap

For the sake of this analysis, I had to assume that 100% of the move in WMT and the 9 other stocks on Thursday, September 21st was due to this one issue. While that’s not an assumption I usually like to make, I feel it’s acceptable given that all of these stocks had volume on Thursday that far exceeded their 3-month averages. In fact, the volume was a major reason I decided to look at this whole thing. For example, CVS traded 42,717,900 shares versus a 90-day average of 5,284,360 ( a 708% increase.) WAG had a 482% increase and the other 7 stocks all exceeded 100% increases with an average of 201%. And what to say about WMT’s incremental volume? It was inconsequentially 11% higher than normal. Somehow - this event encouraged a lot of institutional (and retail) holders to sell the other 9 stocks, but didn’t really excite anyone to buy into WMT. Clearly, this has a lot to do with the fact that drugs are the primary business for the others and only one of many revenue streams for WMT. However, I was expecting to see more action in WMT and it just didn’t happen. And as you can see, WMT lost money on the day of their big announcement.

For anyone that actually missed the highlights of the actual deal - Wal-Mart plans to sell 291 generic drugs (about 10% of the 3,000 generics sold at pharmacies) for just $4 per month in Florida before it migrates the plan to the rest of the country. Critics of the program say that the 291 drugs include several that are listed multiple times, using different dosage amounts and they also point out that the drugs are mostly older ones that have been on the market longer and are already less expensive. Most of the drugs on Wal-Mart’s list are cheap, marginally profitable and rarely use co-payments for their purchase. This last part is critical given that customers who pay with cash, rather than through insurance, are a small fraction of the major drug store purchases. In fact, CVS said that cash sales represent less than 0.5 % of its total pharmacy sales and WAG echoed that saying nearly 95% of their pharmacy patients have insurance coverage. A Walgreen spokesman said the average co-pay for the medications on Wal-Mart’s list is just over $5 and that really makes a key point - How many patients are going to change their purchasing behavior for $1 per month per drug? And is it revolutionary? - because a comparison of prices on Drugstore.com revealed that some generics could be purchased cheaper (albeit in larger quantities) than Wal-Mart’s new plan and Kmart was quick to claim that its existing plan is already superior.

For Wal-Mart’s part, I think this was a great public relations move and that’s about it. I really doubt that their pharmacy sales and profits will benefit from this strategy. If it’s really going to work, a whole new crop of shoppers would have to be inspired to come into WMT for $4/month drugs and then buy other stuff in the store that will actually make some profit. I doubt that too. I suspect that many patients are loyal to their existing neighborhood pharmacy for reasons such as proximity and convenience. There’s a big difference between parking in the back of a humongous Wal-Mart lot and the drive-throughs that so many CVS and WAG stores offer, especially for senior citizens or sick people. I suspect that “big difference” is more than $1 to $5 per month per drug.

The group that will benefit most from the new program will be the uninsured and they are clearly deserving of help. For them, the average out-of-pocket cost for a generic prescription drug last year was $29.82, according to the National Association of Chain Drug Stores. Wal-Mart’s plan could represent substantial savings for this group, especially for families that are repetitively taking several medications on the list. However, as I mentioned before, this customer group is probably about 1-5% for the major drug retailers and given their low-income demographics, there is a pretty good chance that they have been greeted with a big yellow smiley and “Welcome to Wal-Mart” for years.

It was clear from the market reaction that this was less of a story about WMT and more about a projected change to the other stocks I mentioned. While I have UP signals on all the other 9 stocks, I don’t like the current prices as good new entry points for positions. I just don’t think the WMT plan was a great reason to dump them. At some point, you really have to wonder whether the $9.8 Billion in lost market cap from the 9 stocks I analyzed was reflective of the actual financial impact. If you think that it was, then you probably have sold. If not, it’s still questionable in my undrugged mind whether it’s worth rushing in for a trade. You’d probably save more money by purchasing your drugs at Wal-Mart!