Amazon pharma play signals ‘true disruption’ in future
When Amazon.com Inc. muscles into a new market, the entrenched players often take a hit on Wall Street. And so it went on Tuesday when the world’s largest online retailer announced it had started a web drugstore and would offer discounted meds to Prime subscribers.
CVS Health Corp. shed about 8.6 per cent and Walgreens Boots Alliance Inc. sank 9.6 per cent as investors and analysts tried to figure out whether Amazon was set to disrupt another industry as it has done with books, logistics and cloud computing.
Amazon has worked hard to rid its digital shopping mall of the opaque pricing and powerful intermediaries that would appear to make the health-care industry ripe for disruption. But for now Amazon Pharmacy, built atop the company’s two-year-old PillPack acquisition, strikes some leading analysts as a decidedly me-too effort that won’t immediately revolutionize the prescription drug business.
For starters, Amazon isn’t using its size and clout to negotiate discounts on drugs. Rather, it’s outsourcing the job to Inside Rx, a unit of Cigna Corp.’s pharmacy-benefit manager Express Scripts — the very archetype of a traditional industry player. That means Amazon will tap into the existing infrastructure used to pay for prescription drugs rather than transforming the model, as some industry watchers had expected the company to do.
What’s more, state and federal regulations limit Amazon’s ability to make use of its existing logistics network. Amazon Pharmacy will use a dedicated set of warehouses — located in Arizona, Florida, New Hampshire, New York and Texas — and ship goods to homes through a variety of carriers, a spokesperson said.
In other words, customers shouldn’t expect their medicine to come in the same package as the printer cartridge and pack of socks they ordered. And investors shouldn’t expect Amazon to reap the logistical efficiencies of such a commingling.
When Amazon announced its pharmacy store on Tuesday, Adam Fein, chief executive officer of the Drug Channels Institute and an expert on the prescription-drug supply chain, thought he was seeing something transformative. But as he dug into the details, Fein came to view the offering as less novel than it seemed.
“Perhaps one day they’ll become a true disrupter,” Fein said in an interview. “At this moment they’re choosing to join the drug channel, not fundamentally change it.”
None of this is to say that Amazon won’t prosper selling prescription drugs — or give its rivals heartburn.
The pandemic has prompted Americans to stampede online in record numbers. Meantime, many have grown accustomed to web consultations with doctors and arranging COVID-19 tests on a smartphone.
“These macro behavioural changes increase the likelihood that Amazon’s pharmacy product could gain traction,” Morgan Stanley analysts wrote in a note, adding that capturing these customers will require Amazon to offer competitive prices and selection.
Perhaps the most novel aspect of Amazon Pharmacy is its pledge to foster price transparency by letting shoppers know how much a drug costs through their insurer versus how much it costs if they buy it themselves. Many Americans assume that insurance companies get a better deal on drugs.
That’s not always true, but the entrenched economics of the health-care system are hard to dislodge. Walmart Inc. roiled the industry a decade ago by selling cheap generic drugs at a set price, growing the company’s business without upending the U.S. health-care system.
The discounts offered to Prime members represent an opportunity to expand a loyalty program that has fuelled Amazon’s rise. Older people are an especially tempting demographic.