Walgreen Co. (NYSE:WAG), the nation's largest drugstore chain by store count, has had its stock target price lowered by Merrill Lynch Canada analyst Patricia Baker. Baker has edged down her 12-month price target to $54 from $56 as she worries about the competitive threat from mighty Wal-Mart Stores Inc. (NYSE:WMT), which has recently began a major shift, lowering prices on over 300 generic prescription drugs in its pharmacies.

I posited this fact back in October when Wal-Mart first announced its new pharmacy pricing program. I think there will be negative impacts to the businesses of both CVS Corp. (NYSE:CVS) and Walgreen's in 2007 as the full effect of Wal-Mart's drastic prescription drug price cuts is felt. How much will the nation's two largest drug chains feel the pinch? That is a good question.

Wal-Mart's program has not had enough time to be properly measured, and Baker says she hasn't seen any sign yet that Wal-Mart is eating into Walgreen's sales, but, she says uncertainty is increasing. The fact that Walgreen's competitor CVS is merging with Caremark Rx Inc. (NYSE:CMX) managed healthcare should most likely only add to the broiling temperatures in Walgreen's in 2007.

CVS Drugstores, the nation's largest chain of specialty drug retail stores, reported that its November same-store sales growth topped the 8.4% mark for November, sending CVS shares upward. This even though Wal-Mart and Target both launched a $4 generic prescription drug program in this last quarter that I believe will erode some of the fatter margins that CVS currently enjoys with its drug business.

Analysts expected an 8% same-store sale growth in November, so CVS's actuals outpaced that figure by a decent amount. Total sales for the four weeks ended Nov. 25 at CVS stores nationwide jumped 23.3 percent to $3.6 billion.

CVS purchased a new slew of stores, Albertsons Inc., which added some nice oomph and sales figures to CVS's November sales. While CVS lags behind retailing competitor Walgreens, it has more actual stores and has agreed to merge with Caremark soon, which will give it a revenue boost (although not in store count). Strangely, neither CVS nor Walgreens has matched Wal-Mart's or target's $4 generic drug strategy. Could this hurt them next year as customers flock out of specialty drug chains and into Wal-Mart for cheaper drugs?

With Wal-Mart Stores Inc. (NYSE: WMT) and Target Corp (NYSE: TGT) set to challenge the traditional drug store chains as they lower prices on prescription generic drug, what is in store for national chains like CVS Corp (NYSE: CVS) and Walgreens? You'd never know that CVS feels threatened, yet, especially after the retailer reported rising sales for the September same-store sales period.

No surprise, since the full effect of Wal-Mart's massive move, which is only available in Florida for now, has not yet shaken up the retail drug industry. Add Target into that mix, and by this time next year, the heat may indeed be on, having a large impact on CVS and Rite-Aid among other. Rite-Aid is also in the midst of buying national drug retailer Brooks Drugstores from Canada's Jean Coutu.

CVS increased its third-quarter EPS guidance range to 31 to 33 cents from a previous range of 28 to 30 cents -- but a few more quarters of upped guidance may be all that's left in store for CVS and other retailers as they start feeling the heat of Wal-Mart and Target. Will they match the new 40% discounts on over 300 generic prescription drugs in an attempt to keep customers? If not, what do you think -- will Rite-Aid, CVS and Walgreens have a rosy or dark 2007?