Will we be able to Amazon prime prescription drugs soon?

Amazon is rumored to have taken measures to enter the pharmacy supply chain market. Can it be successful in pulling off yet another disruption?

The US prescription drug market is a $560bn[1] per year industry that is rife with inefficiencies. Due to the large number of players involved in the drug delivery process – including manufacturers, insurance companies, pharmaceutical distributors, pharmacy benefit managers (PBMs), retail pharmacies and the end consumer – US drug pricing is incredibly convoluted. Of the 4 billion prescriptions filled in the US every year, only 12% are mail-ordered, while the rest are purchased at one of the 60,000 retail pharmacy locations[2]. Given that 70%of these prescriptions are refills of ongoing medications[3], one cannot help but wonder why home delivery isn’t more prevalent.

Amazon seems perfectly poised to enter and disrupt this highly regulated space by leveraging its scale, dependence on technology and its well-built logistics and distribution network. Amazon’s presence would unlock several benefits for consumers, including downward pressure on prescription drug pricing, same day or next day home delivery and a better, more transparent, digitalized buying experience. Amazon would also benefit in various ways: apart from the huge financial opportunity, Amazon would gain access to large amounts of customer data that would enable it to understand its customers better and cross-sell current product offerings. The prescription drug supply chain could also be a fitting entry point into the broader >$3 trillion US healthcare industry[4], a space in which Amazon could one day be an end-to-end, fully digital provider by integrating its existing technologies.

Amazon’s entry into the market would affect all existing players, but PBMs and retail pharmacy chains would likely face the biggest upfront threat. In the current distribution model (Figure 1), PBMs act as middlemen by negotiating with pharmacies and drug manufacturers on behalf of health insurers. Though, in theory, this should bring drug prices down, there has been a steady increase in drug prices exacerbated by a lack of pricing transparency, which has resulted in PBMs being criticized[5] for artificially hiking prices to increase profits. PBMs also fulfill mail-order prescriptions, a process notorious for low visibility, terrible customer service and an all-round poor customer experience[6]. According to CNBC, Amazon has already taken steps in building its own PBM for Amazon employees, a task that required hiring industry expert Mark Lyons from Premera Blue Cross[7]. Whether Amazon will decide to scale its own PBM out or enter the market by acquiring an existing PBM is unclear. The benefits of the latter seem more compelling, as an acquisition allows Amazon to gain instant scale, navigate the regulatory environment, gain access to customer data that can be integrated with Amazon.com, and manage the customer experience while allowing the PBM to continue dealing with claims.

To assess the feasibility of disruption, Amazon has started taking certain steps to test the waters. Amazon has reportedly been in discussions with industry experts and middle market PBMs, seeking advice from those who know the market better. Its reliance on industry insiders is further evidenced by its recent recruiting from within the pharmacy sector, including the hiring of a new general manager who is rumored to be developing a strategy to enter the pharmacy business[8]. Amazon has also started selling pharmaceuticals through Prime Now in Japan with the support of local partners[9]. Amazon has been known to test new product lines in non-US markets before rolling them out domestically, meaning the foray into drugs in Japan may be a learning experiment. In a similar vein, domestically Amazon has started selling less regulated medical supplies and equipment, recently acquiring licenses in 12 states to enable distribution[10].

Despite these initial steps, if Amazon does decide to enter the pharmacy market there are many other hurdles that will need to be crossed. Historically, one of the main barriers to entry has been obtaining the appropriate licensure at both the federal and state level. Another issue is the fact that the industry is already highly consolidated, with a few key players holding long-term purchasing partnerships with each other – whether they will accept Amazon as a new entrant is debatable. Furthermore, there is the age gap to consider: though 5 out of 10 consumers surveyed by Wells Fargo claimed they would use “Amazon Pharmacy” if the company pursued it[11], the average age of a prescription drug user is 54 years, versus the average age of an Amazon customer of 37 years[12].

These issues can likely be overcome depending on the strategy Amazon chooses to employ: it could become an online pharmacy, integrate with a PBM, add retail locations (by leveraging Wholefoods stores) or simply handle drug distribution directly to pharmacies. However, the question remains whether Amazon can or even wants to attempt to digitalize this highly complex, inefficient market.

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Sources:

[1] Christina Farr, “Amazon is on the brink of deciding if it will make a big move into selling drugs online,” CNBC, October 06, 2017, [https://www.cnbc.com/2017/10/06/amazon-considering-selling-online-prescriptions-decision-coming-soon.html], accessed November 2017

[2] Robert P. Jones, “If healthcare is Amazon’s next frontier, partnership may be what the Dr. ordered,” Goldman Sachs Equity Research, August 10, 2017, p.4, via Thomson Reuters, accessed November 2017

[3] Ibid., p.5

[4] Advisory website, “CMS: US health care spending to reach nearly 20% of GDP by 2025,” February 02, 2017, [https://www.advisory.com/daily-briefing/2017/02/16/spending-growth], accessed November 2017

[5] Samantha Liss, “Amazon threatens to disrupt the prescription drug delivery business, analysts say”, St.Louis Post Dispatch, October 22, 2017, [http://www.stltoday.com/business/local/amazon-threatens-to-disrupt-the-prescription-drug-delivery-business-analysts/article_992f0802-ce19-5bde-af80-2f1b99f4aa08.html], accessed November 2017

[6] Ibid.

[7] Christina Farr, “Amazon is hiring people to break into the multibillion-dollar pharmacy market,” CNBC, May 16, 2017, [https://www.cnbc.com/2017/05/16/amazon-selling-drugs-pharamaceuticals.html], accessed November 2017

[8] Ibid.

[9] Shusuke Murai, “Amazon launches same-day delivery service for food and medicine”, Japantimes, April 19, 2017, [https://www.japantimes.co.jp/news/2017/04/19/business/amazon-launches-same-day-delivery-service-for-food-and-medicine/#.WgzcHWhSw2w], accessed November 2017

[10] Stephen Buck, “Amazon may indeed be getting into the pharma space but recent state license deals are not related”, CNBC, October 31, 2017, [https://www.cnbc.com/2017/10/31/what-is-amazon-doing-in-health-and-the-pharmacy-industry.html], accessed November 2017

[11] Annie Palmer, “Why Amazon May Want to Crush Walgreens and CVS By Selling Prescription Drugs,” The Street, October 20, 2017, [https://www.thestreet.com/story/14166157/1/here-s-why-amazon-s-next-big-market-could-be-in-the-pharmacy-business.html], accessed November 2017

[12] Robert P. Jones, “If healthcare is Amazon’s next frontier, partnership may be what the Dr. ordered,” Goldman Sachs Equity Research, August 10, 2017, p.4, via Thomson Reuters, accessed November 2017

 

Figure 1 – Current dynamics of the pharmaceutical drug supply chain

Source: Jack Du, “What Is the Pharmacy Benefit Management Industry?”, Investopedia, July 02, 2015, [https://www.investopedia.com/articles/markets/070215/what-pharmacy-benefit-management-industry.asp], accessed November 2017

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4 thoughts on “Will we be able to Amazon prime prescription drugs soon?

  1. I do see the value Amazon could bring to a what is a pretty inefficient sector. Amazon’s entry into the supply chain could lead to a reduction in prices by eliminating middlemen and reducing lead times through better database and process management. There is a clear value proposition for PBMs and manufacturers through better access to customer data and trends, while customers would value better customer service.

    I do have concerns about Amazon’s increasing influence in almost every major customer segment I can think of. Entry into healthcare also provides the company with access to sensitive patient data which it could use to potentially cross-sell other products. While technically legal, I am worried about the width of information the company is starting to hold on its consumers. And while it has successfully disrupted many of the sectors it has entered so far, I wonder if entering the complicated US healthcare market would be a step too far.

  2. Great post Sahil. While I wouldn’t portend to fully understand the regulatory hurdles to this, I think your point about cross-selling is spot on. As part of their buildup to black Friday Amazon began selling high-margin Echo devices out of low-margin yet high foot traffic stores. Unclear how to isolate the impact of this particular cross selling strategy but they also substantially outperformed on black Friday sales this year. The extent to which they are able to continue to cross sell products will have a huge impact on their success. This is undoubtedly brick and mortar cross selling but their decision to pursue this strategy likely came (hopefully) from some sort of data driven conclusiion regarding the income demographic of the Whole Foods shopper.

    I do wonder – is there a risk of forgery/fraud here? Information security regarding sending pills to an address would certainly be a concern relative to the status quo of presenting a valid ID in a pharmacy.

  3. The graphic illustrating the Pharma Distribution supply chain caught my attention: it is complex and seemingly ripe for disinter-mediation. As articulated in the article – the greatest hurdle to cross is a relationship issue. The Pharma supply chain is longstanding with deep-rooted relationships between manufacturers, PBM’s, Pharmacies and consumers. Will a new entrant like Amazon be accepted by the ecosystem? The low hanging fruit for Amazon will be to tackle the over-the-counter OTC drugs that are widely available and have multiple manufacturers – the first step to trialing the convoluted regulatory and identification hurdle.
    It begs the question – what roles do doctors play in the purchasing decision? As the prescription writers, do they play a key role for Amazon? Or are they simply a cog in a well established supply chain ecosystem?

  4. I will start out and say that I would love for Amazon to bring efficiency to the current prescription market where you have to physically go to a store and wait in line to make a purchase. Though I share Ninad’s worry that Amazon is expanding its tentacles into every aspect of our lives, I do welcome its customer service when it comes to such an opaque and inefficient market as healthcare.

    I think doctors are largely responsible for many inefficiencies due to the lack of focus on management systems and operations. Doctors should realize that better operations from newer technologies and great enhance patient outcomes, especially after the patient is no longer under the care of the doctor.

    Lastly, today’s 37-year-old will become 54 in 2 decades. Better to lock them into Amazon now than wait. Plus, the total market size for prescription drugs may actually increase if more people are buying drugs because of the ease of Amazon.

    My main question is what does Amazon want to me? Do they really want to be A to Z of our lives?

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