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Friday, September 22, 2006

Wal-Mart Generics to Cause a Chain Reaction

Submitted by CrossProfit edited by Saul Sterman in Retail/Healthcare on stocks WMT, TEVA

Wal-Mart announced on Thursday 9/21/06 that it will start selling nearly 300 generic drugs at greatly reduced prices. The announcement got the usual pooh pooh from the usual industry analysts. Yes, it is not 300 drugs and only 90 drugs with different doses. Yes, it is only in Florida. Yes, it doesn’t do anything for Wal-Mart’s employee healthcare coverage or is that non-coverage. Yes, it is being flaunted as a PR (public relations) program claiming to help 2.7 million uninsured Floridians…and everyone seems to be missing the point!


The two most potent ingredients contributing to inflation woes that are threatening the health of the U.S. economy are energy and healthcare. The third ingredient is the Federal deficit. Energy seems to be getting under control so now it is time to tackle healthcare. Coincidently Mr. Economy has a willing ally. Wal-Mart doesn’t want the politicians to mess with their empire so it makes sense to play ball and make a buck at the same time.

The bigger picture reveals a paradox. In order for the stock market to flourish, businesses have to show a YOY (year over year) increase in both revenues and profits. If businesses continue to expand as they have been for another year then this in turn will put pressure on the Federal Reserve to increase the interest rate to slow down the economic expansion due to inflationary price pressures. If the Fed increases the interest rate, then the rate of growth is limited. If the rate of growth is limited then the Federal deficit increases as the mechanism in place relies on growth as the only means to reduce the deficit. If the deficit grows… and so on and so forth.

The objective is to reverse the negative chain reaction into a positive one. Just to get you started, this means; increase economic activity by increasing the amount of services and goods purchased without printing more money to put into the hands of the public. In other words, reduce costs of the imported components in the U.S. economy. The more times a dollar bill changes hands, the higher the economic activity = higher tax receipts, but we won’t get into that now.

Three Strikes and Inflation Is Out (rules of baseball)

When it came to the energy component the solution was obvious. Since the majority of energy is imported, lower raw material costs meaning lower crude prices have a positive impact on the economy. Imports are lower yet the U.S. component in the production chain is little changed. The consumer spends a smaller percentage of their income on energy leaving more dollars for other expenditures and maybe some savings.

Healthcare is a whole different ballgame. The vast majority of healthcare costs are local U.S. inputs. Both personnel and the majority of equipment are “made in USA”. Any price reduction, i.e. lower salaries or lower equipment prices would have a direct adverse effect on the economy. The only area that can take a hit without adversely affecting the economy is the generic drug scene. Teva probably saw this coming. As the largest seller of generics in the United States, margins are going to be pitched by Wal-Mart playing on its home turf. Florida is the test market. As usual, Wal-Mart punts an idea in one location, refines the strategy, steals some base suppliers from the competition (probably to include every generic drug under the sun) and with bases loaded goes national. It will be interesting to see Teva’s game plan. How the battered Federal deficit is going to play out is beyond me.

By the way, one of us played baseball yesterday.

Disclosure: This article was written by a CrossProfit analyst and may not reflect the opinion of Unless explicitly stated otherwise there are no conflicts of interest.

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