NEW YORK — The retail pharmacy market may soon face an unwelcome challenge from e-commerce giant Amazon.com Inc.
According to a recent report by CNBC, the company has hired a number of people from the pharmacy industry and is conducting a search for a general manager to lead a team and create a strategy.
The report, which cites two people “familiar with the company’s plans,” notes that Amazon has held at least one annual meeting at its headquarters in Seattle to discuss whether or not it should enter the pharmacy business. The increase in the number of high-deductible insurance plans and the trend of consumers increasingly paying for their health care reportedly has pushed the e-tailer to consider the field more seriously.
Other suggestive recent moves include the hiring of Mark Lyons from Premera Blue Cross two months ago, the recruiting of staff to run a professional health care program and ensure its regulatory compliance, and Amazon’s entry into the medical supplies and equipment category. Lyons reportedly was hired to create an in-house pharmacy benefits manager for Amazon employees that could theoretically be scaled up and taken outside the company.
Reaction to the report, which was not confirmed by Amazon, has been mixed. Adam Fein, chief executive officer of the Drug Channels Institute and president of Pembroke Consulting, told The Washington Post that the easiest path to market entry for Amazon might be targeting patients who pay cash with discount coupons from manufacturers, either because they are uninsured or they are looking for a better price than that available under their coverage.
“I suspect that fulfillment of low-cost generics would be the most logical place to enter the market,” Fein writes in a recent post on his Drug Channels blog. “It would accelerate price competition in the pharmacy industry.”
Amazon might also create, acquire or partner with a discount card program, Fein suggests, with acquisition perhaps being the easiest route, since discount card vendors such as GoodRx and Blink Health are owned by venture capital firms that could be eager to sell for the right price.
However, Fein cautions that Amazon’s range of feasible options for entering the pharmacy and PBM spaces is limited. He considers the barriers to entry into the PBM field as too high for an outsider such as Amazon. He also points out that the mail order pharmacy segment is not exactly flourishing, being the only drug channel that has experienced a significant decline in the number of prescriptions dispensed, according to QuintilesIMS. Mail order pharmacy also generally wins lower satisfaction scores from consumers than brick-and-mortar drug stores.
After interviewing a number of financial analysts, Johanna Bennett writes in Barron’s that, in addition to the decline of mail order penetration over the last several years, Amazon would face a number of obstacles to entering the business, including the complexity of the health care system, and a highly consolidated industry distinguished by a maze of nontransparent relationships among pharmacy operators, PBMs and other payers.
Nonetheless, some observers see more than enough opportunity for Amazon to enter the pharmacy arena.
“The single biggest trip-driving category in most of the data I’ve seen is prescription drugs,” points out Keith Anderson, senior vice president of strategy and insights for Profitero Inc., a data analytics firm. “It certainly is a trip and traffic driver to physical stores, and it has the potential to be the same for Amazon. That’s the same reason Amazon has continued to double down on food and consumables: the frequency with which they’re purchased and how important they are to a household.”
In addition, as Anderson and other observers note, the profit margins available in pharmacy are another major source of appeal to Amazon, which remains under pressure to improve its profitability.
“High-margin categories such as apparel or prescription drugs are appealing to Amazon for that reason, but also because high-margin businesses tend to represent a unique opportunity for it to compete asymmetrically,” Anderson says. “Jeff Bezos loves to explore large, mature categories that have ample margin for him to lower prices asymmetrically and still leave enough meat on the bone to improve Amazon’s margin profile.”
While acknowledging that the complex structure of the pharmacy industry, the regulatory hurdles and the uncertainty hanging over the entire health care industry all constitute formidable obstacles for Amazon, Anderson points out that the company’s experience with its Amazon Prime and Prime Now programs have given it greater ability than ever before to offer same-day delivery.
And in fact, Amazon Prime members represent a consumer segment that would likely welcome the opportunity to obtain their prescription drugs as well as other products from the e-commerce behemoth.
“They are already delivering a lot of items in batched deliveries,” Anderson points out. “If a mail order pharmacy is delivering one prescription to a customer, and Amazon is delivering a prescription and several other items, guess who has the advantage.”
Nevertheless, he does not expect Amazon to make a sudden big splash in the industry. Rather, he notes, the company has a long track record of slow, deliberate exploration of large, high-potential markets and then building from a small base to become a major player in category after category, business after business.
“Amazon doesn’t shy away from challenges or obstacles when they believe that the opportunity is large enough,” he says. “Nothing they’ve ever done has been an overnight success, but don’t underestimate their conviction and their ability, with sustained effort, to get the outcome they want.”