Amazon threatens to disrupt the prescription drug sector

In 23 years, Amazon has transformed itself from a relatively unknown online retailer into a behemoth that has toppled traditional big-box stores by attracting consumers to its speedy home delivery model and low prices.

Now, on the heels of acquiring the Whole Foods grocery chain, some analysts say Amazon has set its sights on entering the pharmaceutical industry, in particular Express Scripts’ territory of managing prescription drugs for millions of Americans.

Analysts at Boston-based Leerink Partners say it’s no longer a question of if Amazon enters the industry but when — even though many details are still unclear, such as the type of business model the online retailer is likely to pursue.

“While (Amazon) is likely still researching what its ultimate strategy should look like, with (75 million Prime members) seemingly unlimited resources, and highly advanced technology capabilities, we believe (Amazon) can create disruption to the existing market,” Leerink wrote in a report earlier this month.

The U.S. industry currently is dominated by three pharmacy benefit managers, or PBMs; Express Scripts, CVS’ Caremark and UnitedHealth’s Optum.

All three have distinctly different business models.

Express Scripts operates as a standalone pharmacy benefit manager. CVS leverages its 9,700 retail pharmacy locations to manage prescriptions for its clients. UnitedHealth’s OptumRx operates under the umbrella of its health insurance business, which is the nation’s largest.

Pharmacy benefit managers act as the middleman between drug manufacturers and employers or health plans. They negotiate drug prices on behalf of their clients and decide what drugs are covered — and ones that aren’t.

Because of that role, the pharmacy benefit managers have been criticized by some for playing a role in soaring drug prices.

Not all analysts are convinced Amazon will enter the industry.

“I think the Amazon getting into the PBM business is a bunch of B.S.,” said Vishnu Lekraj, an analyst with Morningstar. “I don’t understand how a company that can ship goods to a consumer can take over every single industry.”

What attracts Amazon to the pharmacy benefit manager industry, some analysts said, is the opportunity for profit and a way to “develop deeper relationships with consumers,” said Patrick Finnegan, an analyst with Fitch Ratings.

Amazon’s core business is being able to fulfil orders and ship goods to consumers all across America. About 75 million customers pay a set fee each year to be able to receive their orders in two days or less. The program is known as Amazon Prime.

“Mail order is the most likely point of entry and is ripe for disruption,” according to the Leerink report.

It’s the mail order pharmacies of some other pharmacy benefit managers, including Express Scripts’, that have been “besieged by poor customer service and complaints,” according to the Leerink report.

However, analysts warn that the pharmacy benefit manager industry is not as simple as shipping drugs.

“But at the end of the day, you really do have an awful lot of barriers that need to be addressed. They’re not insurmountable, but I don’t think it’s as easy as selling retail products,” Finnegan said.

If Amazon does not decide to build up its pharmacy benefit manager business internally, an option would be to acquire an existing pharmacy benefit manager, potentially Express Scripts, according to Leerink, although the analysts there think a mid-sized acquisition would be more likely.

Or, Amazon could partner with an existing pharmacy benefit manager like Express Scripts, which Leerink says could drive more volume and capture market share from retail pharmacies who are more at risk of Amazon’s entry into the market, particularly with the availability to use Whole Foods locations as pharmacies, too.