The Ascent of Amazon: From Books to…Pills?

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Amazon recently reached its 20th anniversary this May and in celebration of this momentous occasion, it was reported that it had intentions of delving into the multibillion-dollar pharmacy market. Of course, this is not the first time the $450 billion company has taken another industry head-on. For instance, Amazon Web Services produced more than $13 billion in revenue over the past year and has grown to be a primary player in the dynamic cloud-computing market. The company has also successfully scaled the apparel and fashion peak while Macy’s and JCPenney struggle to compete. Amazon even went face-to-face with the formidable Netflix in media streaming and walked away with an Oscar. Originally a site only for books, Amazon has quickly shown its prowess for all things, from books and CDs to clothing and food, from streaming media to delivery drones; it would truly seem that anything Amazon has set its sight on, it has conquered and the pharmacy space most likely won’t be an exception. Or will it?

Healthcare is estimated to be a $3 trillion sector, and while CVS and Walgreens anchor the market, the pharmacy space could still be a multibillion dollar opportunity for Amazon.

However, that space is crowded and filled with pharmacies and pharmacy benefit managers (PBM) that already provide mail-order services. For instance, CVS has longstanding contracts with healthcare providers, using its own PBM to compete with the likes of Express Scripts, a giant PBM that processed over 1 billion in claims in the last year. The search for the perfect PBM partnership is not an easy journey. However, in April of this year, the break-up of Anthem and Express Scripts cost the PBM goliath’s shares to drop 10 percent in the wake of the announcement, its biggest drop since August of 2015. The spat between the insurance heavyweight and PBM means 18 percent of Express Scripts’ revenue will be lost with Anthem being the company’s biggest client, responsible for 31 percent of adjusted EBITDA in 2016. Anthem’s contract expires in 2019 and given their recent turmoil and frustrations with allegations of a lack of transparency with Express Scripts, partnering with other PBMs may not be high on their list. As such, the insurance company may be looking towards building a larger PBM to compete against rivals like UnitedHealth Group, something that Amazon is also reportedly considering, with its new executive hire from Premera Blue Cross.

All this may not be enough, however. Mail orders have been in decline for the last decade with customers preferring instead, to pick-up their prescriptions directly from their pharmacists.

In fact, only 14.5 percent of CVS pharmacy claims were through the mail order channel in the first quarter of 2017. Although already having breached the space, Amazon would need to increase its brick and mortar presence to compete with the likes of Walgreens and other pharmacies already set up to accommodate this in-person preference.

What does all this mean for the possibility of a successful partnership between the business of selling prescription drugs and Amazon, a business built on selling almost everything else? The simple answer is yes, but mainly, for the reason detailed above: timing. The broader implications of the Anthem/Express Scripts standoff highlight a kink in the PBM armor; a small step taken away from the complexities of how PBMs work and one instead, towards transparency and a desire for less ‘handling’ of drug pricing. There is nothing like competition to lower costs for consumers and perhaps Amazon can deliver, which would be a significant point of differentiation.

But the real issue is if it will be able to slay the beast without first having to get into bed with it. Which brings us to strategy: the million-dollar, nay, billion-dollar question is of course, will Amazon be able to garner the leverage required to obtain higher discounts on drugs compared to existing players in the space? Perhaps, if it could fill drugs faster and leverage its in-home technologies such as Alexa to enable consumers to be more compliant with taking their medications. Additionally, the company could just dig into its deep pockets and slash prices enough to initially entice customers to shop for pills while they’re looking for a nice pair of shoes or new gardening sheers. Or perhaps it’s a transition they want, and Amazon could ease into the field by targeting consumers who have no insurance or those with high-deductible plans, offering a rate competitive with its brick and mortar counterparts. Although this would only capture about 9 percent of the market, it would allow the company to dip its toe into the water and test the temperature. Another alternative for Amazon, is buying its way into the market creating a cleaner entry, an unlikely strategy given its propensity for building something to call its own, such as media streaming, delivery drones, and so forth. Ultimately whatever Amazon chooses, this once-upon-a-time online bookstore will be facing its steepest ascent yet, as it embarks on its quest to conquer the pharmacy industry, a space already riddled with a complex political landscape to navigate and rising prescription costs.

Tags: Amazon, BioPharma, Competitive Intelligence, Competitive Strategy, Health & Life Science