Ama­zon poised to de­liver dis­rup­tion in med­i­cal su­ply in­dus­try

Modern Healthcare - - NEWS - By Alex Kacik

Ama­zon is on the health­care in­dus­try’s doorstep. The e-com­merce giant con­tin­ues to trans­form vir­tu­ally ev­ery seg­ment of the econ­omy as it lever­ages its mas­sive dis­tri­bu­tion net­work to de­liver lo­gis­ti­cal har­mony. With a strong­hold on the con­sumer mar­ket, Ama­zon is ey­ing the busi­ness-to-busi­ness seg­ment as it builds its seller base. Soon, that fa­mil­iar smil­ing brown box will make its way from porches to providers’ front doors and that may make for some dis­grun­tled med­i­cal sup­ply dis­trib­u­tors.

Since launch­ing two years ago, more than 45,000 sell­ers have signed on to the Ama­zon Busi­ness plat­form, which es­sen­tially serves as the mid­dle­man for third-party ven­dors. The plat­form of­fers busi­ness pric­ing and quan­tity dis­counts on more than 5 mil­lion prod­ucts, po­ten­tial sales tax ex­emp­tions, same-day ship­ping and free two­day ship­ping for pur­chases over $49. Large or­ga­ni­za­tions can in­te­grate Ama­zon Busi­ness into their pur­chas­ing sys­tems and di­rectly trans­fer data to stream­line pro­cess­ing.

Ama­zon Busi­ness, which gen­er­ated $1 bil­lion in sales in its first year, is one of its im­port- ant ar­eas for growth, ex­ec­u­tives said in earn­ings calls.

“Ama­zon Busi­ness com­bines the se­lec­tion, con­ve­nience and value cus­tomers have come to know and love from Ama­zon, with new fea­tures and unique ben­e­fits tai­lored to the needs of busi­nesses,” Chris Holt, leader of global health­care at Ama­zon, said in a state­ment.

Of note in its busi­ness plat­form, Ama­zon’s grow­ing pres­ence in the med­i­cal sup­ply seg­ment is poised to dis­rupt dis­trib­u­tors. Sim­i­lar to the “Ama­zon ef­fect” felt in other in­dus­tries, a down­ward pric­ing pres­sure will eat away at profit mar­gins and cause dis­trib­u­tors to ad­just ac­cord­ingly.

“Look, if cus­tomers find it ac­cept­able, Ama­zon would be a gi­gan­tic chal­lenge to the busi­ness model to most med­i­cal sup­pli­ers be­cause they have a track record of re­li­able ser­vice and cost struc­ture that kills busi­nesses,” said at­tor­ney Jim She­han, head of Food and Drug Ad­min­is­tra­tion reg­u­la­tory prac­tice at Lowen­stein San­dler.

Ama­zon Busi­ness fea­tures an ar­ray of med­i­cal sup­plies in­clud­ing in­fu­sion pumps, catheters, IV bags, su­tures, for­ceps, hos­pi­tal beds, scalpels and other lab items. One of its “most wished for” items

is a 10-pack of sy­ringes with blunt tip nee­dles and caps for $8.39. Some of its best sell­ers in­clude an AmS­cope bi­o­log­i­cal mi­cro­scope for $84.98, a Famili non­slip dig­i­tal bath­room scale for $14.99 and a Jel­las pocket-size PH me­ter for $11.99. Ex­perts from across in­dus­trial cat­e­gories claim that Ama­zon will typ­i­cally un­der­cut mar­gins by 10% to 20%.

Med­i­cal sup­ply dis­trib­u­tor Owens & Mi­nor, which sells some of its prod­ucts on Ama­zon Busi­ness, saw its rev­enue dip 5.2% in the first quar­ter to $2.33 bil­lion. Its gross mar­gin also fell 5.2% to $281.2 mil­lion com­pared with the first quar­ter last year while its net in­come dropped 22.2% to $18.8 mil­lion. Owens & Mi­nor of­fi­cials noted that there is “on­go­ing mar­gin pres­sure” in its U.S. dis­tri­bu­tion busi­ness.

“Sig­nif­i­cant cost pres­sures will per­sist up and down the value chain, re­sult­ing in stepped-up com­pet­i­tive dy­nam­ics, mar­gin pres­sure and ad­di­tional in­dus­try con­sol­i­da­tion,” Owens & Mi­nor CEO Paul Cody Phipps said in an earn­ings call.

Grainger, the main­te­nance, re­pair and op­er­at­ing prod­uct sup­plier in­clud­ing med­i­cal sup­plies, also saw a dip in sales and gross mar­gins in the first quar­ter. U.S. sales fell nearly 1% to $1.95 bil­lion and its op­er­at­ing mar­gin de­clined by 2 per­cent­age points, driven by price re­duc­tions on one-off, or “spot buys,” and on­line sales.

“We have seen com­pa­nies di­ver­si­fy­ing into higher-mar­gin busi­nesses in re­sponse to the tough com­pet­i­tive en­vi­ron­ment,” said Brit­ton Costa, se­nior di­rec­tor at Fitch Rat­ings.

The med­i­cal sup­ply in­dus­try has been con­sol­i­dat­ing at a fast clip. Ear­lier this year, Bec­ton, Dick­in­son & Co. an­nounced plans to ac­quire C.R. Bard in a $24 bil­lion deal and Car­di­nal Health said it would pur­chase Medtronic’s med­i­cal sup­ply busi­ness for $6.1 bil­lion.

These signs point to con­tin­ued tur­bu­lence in the med­i­cal sup­ply in­dus­try, said Nick John­son, head of plat­form at Ap­plico, which helps com­pa­nies build out ver­ti­cal plat­forms sim­i­lar to Ama­zon.

“Ama­zon will start with the sim­pler and more com­modi­tized items, which will have a sig­nif­i­cant enough im­pact. Dis­trib­u­tors will feel the mar­gin and pric­ing pres­sure,” he said. “The more high-touch ser­vice ar­eas and large con­tracts are not some­thing Ama­zon will get into right away, but they may even­tu­ally.”

Even with the slight­est in­crease in mar­gin pres­sure, in­vestors start to get antsy, John­son said.

Due to reg­u­la­tory hur­dles, Ama­zon is likely to avoid such higher-end prod­ucts as im­plants, so­phis­ti­cated de­vices in car­di­ol­ogy and or­tho­pe­dics, and drugs that re­quire spe­cial han­dling and li­cens­ing. Some smaller health­care or­ga­ni­za­tions have sourced ba­sic med­i­cal sup­plies from Ama­zon Busi­ness, ex­perts said.

“It could be ter­rific,” said Gene Kirtser, CEO of ROi, a sup- ply chain man­age­ment com­pany that has more than 100 group pur­chas­ing or­ga­ni­za­tion mem­bers. “If you are a pure dis­trib­u­tor I would be re­ally wor­ried. But as a health­care sys­tem, we want com­pe­ti­tion and in­no­va­tors and costs to come down. All it will do is make tra­di­tional dis­trib­u­tors bet­ter, which is what we’re look­ing for—some­thing to light a fire.” Eric Wil­son, di­rec­tor of pur­chase to pay at Basware, which de­vel­ops e-in­voic­ing solutions, also wel­comed com­pe­ti­tion. “Any­thing that brings more com­pe­ti­tion in the mar­ket and ben­e­fits the end cus­tomer is a good thing,” he said. “It will be a much more com­pet­i­tive mar­ket when some­one the likes of Ama­zon can bring to bear 100,000 sup­pli­ers in one fell swoop.” Yet, Ama­zon may find out that the health­care in­dus­try is a “tough nut to crack,” Kirtser said. Wal­mart Stores was fore­cast to lever­age its dis­tri­bu­tion cen­ters to make a big splash in the in­dus­try, but that never came to fruition, he said. Many low-cost items are bun­dled into larger con­tracts. If a health sys­tem be­gins to source goods out­side of those bun­dles, dis­trib­u­tors could in­crease prices on another seg­ment of goods or re­duce re­bates. “This in­dus­try in a way al­most in­su­lates it­self,” Kirtser said. “It is such a com­plex ecosys­tem to nav­i­gate. It has a lot to do with re­la­tion­ships. Where Ama­zon plays, de­ci­sions are made more black and white. Health­care is so gray and con­vo­luted.” But a com­pany like Ama­zon could over­come those bar­ri­ers with enough time and cap­i­tal, Costa said. Ex­ec­u­tives at Cleve­land Clinic and Mercy said they had not pur­chased any med­i­cal de­vices or sup­plies from Ama­zon Busi­ness. “We re­ceive the best value by ne­go­ti­at­ing our con­tracts and pur­chas­ing our prod­ucts di­rectly from man­u­fac­tur­ers and our ap­proved dis­trib­u­tors,” said Jef­frey Ros­ner, Cleve­land Clinic’s se­nior di­rec­tor of phar­macy sourc­ing and pur­chas­ing. Med­i­cal dis­tri­bu­tion com­pany Henry Schein de­clined to com­ment on Ama­zon Busi­ness’ im­pact. Pen­si­amo, a sup­ply chain ven­ture formed by Univer­sity of Pitts­burgh Med­i­cal Cen­ter and IBM, said it is look­ing to col­lab­o­rate with Ama­zon to try to lower costs in the health­care sys­tem. Health­care rep­re­sents a sig­nif­i­cant growth mar­ket for com­pa­nies across the in­dus­try as the pop­u­la­tion ages and peo­ple live longer. A grow­ing pop­u­la­tion of se­niors means ad­di­tional health­care ser­vices. Ama­zon is ru­mored to be look­ing to break into the phar­ma­ceu­ti­cal mar­ket, but the com­pany would not com­ment on re­cent re­ports. De­mand for dis­pos­able med­i­cal sup­plies in the U.S. is fore­cast to ex­pand 4.2% an­nu­ally to $54.1 bil­lion in 2020, ac­cord­ing to a 2016 Re­portLinker study. Ama­zon has ex­panded its cloud-com­put­ing ser­vice, Ama­zon Web Ser­vices, which is work­ing with com­pa­nies in­volved in life sci­ences and ge­nomics, health­care ex­perts said. The com­pany has also added em­ploy­ees with a range of ex­pe­ri­ence in health­care. “I’m sure it is mak­ing some peo­ple ner­vous,” Kirtser said.

"It is such a com­plex ecosytem to nav­i­gate. It has a lot to do with re­la­tion­ships. Where Ama­zon plays, de­ci­sions are made more black and white. Health­care is so gray and con­vo­luted." Gene Kirtser CEO of ROi

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