Amazon’s long shadow falls on the pharmacy business2 min read . Updated: 18 May 2017, 10:54 AM IST
With prescription-drug spending growing every year and high-deductible plans on the rise, the industry is ripe for large, low-cost options
New York: It’s hard to think of an industry Amazon.com Inc. isn’t currently trying to conquer, or at least thinking of conquering. Pharmacies might be next.
According to a CNBC report, Amazon is considering a leap into the prescription-drug business. It wouldn’t be easy, but the industry and its investors shouldn’t dismiss the threat.
It’s easy to see why pharmacies might be attractive to Amazon. CVS Health Corp.’s mail-order drug business brought in more than $10 billion in revenue in the first quarter alone. If Amazon is thinking of going after the broader pharmacy benefit management (PBM) business—and that’s a possibility, given it reportedly hired someone to create an internal PBM—then it’s looking at a sector that brought in more than $200 billion in revenue last year.
If Amazon can offer an experience that significantly improves on existing mail-order options in price or convenience, then it could substantially disrupt retail drug stores, as well. The company is already chasing a chunk of drug-store business with its general e-commerce platform and private-label vitamins, batteries, and groceries. But the pharmacy in the back is a potentially even juicier target; drug sales provide the vast majority of retail revenue for America’s biggest drug stores.
Most people still pick up their prescriptions in a store—only 14.5% of CVS pharmacy claims were through the mail-order channel in the first quarter—making this a juicy target for Amazon’s war on physical retail.
Amazon is not exactly shy about pursuing complicated businesses with large incumbents. Many thought it was crazy to try breaking into corporate computing, which was dominated by enormous companies such as Microsoft Corp. Now it has a high-margin business, Amazon Web Services, that produced more than $13 billion in revenue over the last 12 months and is one of the most important players in the rapidly growing cloud-computing market.
There are many other examples of Amazon jumping into complicated businesses where it was expected to fail. It is now the largest online clothing seller and is becoming a major threat in fashion, once thought to be a safe brick-and-mortar bastion. And Jeff Bezos can chuck an Oscar and an Emmy at those who assumed the company’s move into original programming would flop.
The pharmacy business would bring plenty of extra challenges. For one, it involves a particularly heavy dose of regulation. On top of that, Amazon would have to deal with incumbent PBMs and insurers. PBMs do more than just fill prescriptions; they design drug benefits and find ways to keep client drug spending down, all of which is well outside of Amazon’s area of expertise.
At the same time, Amazon has many advantages when it comes to selling just about anything. Hundreds of millions of people buy something from Amazon every year, something no other company, let alone another pharmacy, can really match. It’s arguably better at managing speedy delivery and consumer experience than its potential competitors. That gives it a real chance to increase the market penetration of online and mail-order drug options.
With prescription-drug spending growing every year and high-deductible plans on the rise, the industry is ripe for large, low-cost options. Big PBMs report fairly slim operating margins that range from around 4 to 7%. Outside of Amazon Web Services, Amazon is comfortable with far less than that.
And because of the way they report revenue, PBMs may actually be far more profitable than they look at first glance. That might change if Amazon comes after them. Bloomberg