The online retail
giant moved into the roughly $800 billion U.S. grocery market in June
by buying Whole Foods Market Inc. Drugs, a $450 billion industry in the U.S.,
are likewise most often sold from brick-and-mortar stores. Shoppers filling
prescriptions frequently pick up toiletries, beauty supplies and dish
soap—all retail items Amazon already sells. And the distribution chain for
drugs has lots of middlemen whose markups Amazon can seek to undercut.
No wonder shares of drugstore
chains CVS Health Corp. and Walgreens Boots Alliance Inc. have dropped sharply
since analyst speculation about Amazon entering the pharmacy business
intensified last month. On Monday, CVS Health said it would begin same-day
delivery in several cities in early 2018, an apparent defensive
move. Amazon has never commented on its pharmacy ambitions.
Drugs, which are light and
don’t require in-person selection, “are a perfect match” for Amazon, said SSR
Health analyst Richard Evans in a recent report.
Here are six ways the
retailer could overturn the American pharmacy market.
1. Use its shipping power to
destroy rivals
Amazon has a massive logistics
operation and could easily start its own mail-based drug-delivery business,
cutting out drugstores and distributors in the process.
Drug delivery would also add
to the value of Amazon Prime membership. Customers who pay the $99-per-year
price for Prime membership are its most loyal customers, and Amazon is
constantly looking for ways to increase the value of membership to keep
shoppers from using competitors. The company launched its two-hour delivery
service, Prime Now, in 2014 with inventory that overlaps with the convenience
items found in drug stores.
Amazon has a big emphasis on
replenishment. It helps parents keep homes stocked with diapers and wipes and
sells Dash buttons so you can reorder laundry detergent with the push of a
button mounted to your washer. Drugs are an additional replenishment product
that Amazon can use to go deeper into its customers’ lives—taking business away
from traditional retailers such as CVS, Walgreens, and Wal-Mart Stores Inc.
2. Become the ultimate buyer
of cheap generics
There’s no reason the
e-commerce behemoth couldn’t use its buying power to offer customers
cut-rate generics for cash, which would appeal to uninsured patients and
those on high-deductible plans. In generics especially, there are numerous
markups along the way that Amazon could eliminate or pare back to capture
market share.
To gain access to the far
larger market of insured patients, Amazon could cut deals with insurers that
aren’t already heavily focused on mail drug delivery. This could include Humana
Inc., Anthem Inc., Cigna Corp., and even UnitedHealth Group Inc., according to
the recent analyst note by SSR Health’s Evans. Amazon could also makes
drug discount deals directly with large employers, Leerink Partners analyst
David Larsen said in a report on Oct. 31.
3. Turn Whole Foods into Whole
Drugs ...
Now that Amazon owns Whole
Foods, it has a physical presence in which it could set up pharmacies or pickup
points in addition to a mail or same-day-delivery operation. In
addition to Whole Foods, Amazon could supplement this by partnering with local
independent pharmacies, allowing patients to order medicines online for pickup
at these stores or to have them delivered, according to Evans from SSR Health.
4. ...Or buy into the
pharmacy business ...
Amazon could buy a drug
distributor or a pharmacy benefit manager, such as Express Scripts Holding Co.,
which already has one of the biggest mail-order operations.
One downside of an exclusive
partnership is that competitors would probably bar plan members from filling
prescriptions at Amazon, limiting potential customers. So instead of buying a
PBM, Amazon could buy a specialty pharmacy, such as Diplomat Pharmacy Inc., to
help gain access to the fast-growing market for costly drugs for cancer,
rheumatoid arthritis, and other serious diseases, according to SSR
Health.
5. ...Or launch a startup of
its own
Amazon already owns wholesale
distribution licenses in at least 13 states and could build its own
pharmacy business from scratch, restructuring the drug supply chain in the
process. For now, these wholesale licenses may be part of Amazon’s
business-to-business sales effort, which would focus on hospitals, doctors’
offices and dentists. In the longer term, however, the drug-distribution
licenses could be the first step in building a hub-and-spoke model for drugs
that could eventually serve consumers, Leerink’s Larsen wrote in his recent
note.
To become a drug store, Amazon
would also need to get pharmacy licenses in states to which it wants to
ship pharmaceuticals. It could hire several pharmacists in each distribution
center, allowing it to be licensed and serve consumers in nearby states.
6. “Alexa, refill my Lipitor”
Should it go into prescription
drugs, one obvious priority for Amazon will probably be to improve the
consumer experience in shopping for drugs online or on mobile devices. For
refills, using Alexa, Amazon’s voice-activated virtual assistant, would be
just the start.
There are thousands of
different drugs and dosages with prices that vary widely among drugstores
and insurance plans. This makes it hard for patients to know when they are
getting the best deal. Amazon could buy or partner with Rx Saving Solutions, which
has an app that peers into patients’ insurance plans to help them find low-cost
drugs. It could also develop programs similar to that offered by online
pharmacy startup PillPack, which presorts pills into date- and time-stamped
packets for patients with multiple prescriptions.
