Amazon’s pharmacy push is another threat to Wal-Mart, pharmacy chains

Consumers doled out about $412 billion last year on prescription drugs primarily divided among 16 major players in the U.S. market, according to Drug Channels Institute. But online retail titan Amazon wants to poach some of that share as it again mulls taking a stab at the prescription drug category.

Amazon has not made a public announcement about a pharmacy play, but the retailer recently hired Mark Lyons of Premera Blue Cross as its senior manager of pharmacy benefits. Amazon also is reportedly testing one-hour delivery for non-prescription drugs in its home base of Seattle with local drug-store Bartell Drugs.

Carol Spieckerman, CEO of Spieckerman Retail, told Talk Business & Politics there are several factors converging to make pharmacy the next logical frontier for Amazon.

“The increase in high-deductible insurance policies is driving price scrutiny on the part of consumers. That in turn will make Amazon’s value proposition clear and compelling from the start, not to mention the easy point of entry from Amazon’s loyal Prime members,” she said.

“Amazon has redefined convenience in multiple categories – its customers often find Amazon far more convenient than a trip to the store. Even the most efficient brick and mortar pharmacies can’t seem to break the 20-minute minimum wait habit that for now may drive incremental sales but soon could offer a powerful incentive for consumers to switch to Amazon’s no-hassle model,” Spieckerman added.

Earlier this year Wal-Mart instituted its “skip the line” service for pharmacy when a prescription refill is ordered using the retailer’s mobile app. Analysts said the goal of adding the service is to provide customers more convenience in areas where lines from from awaiting services – for example, pharmacy and financial services.

Wal-Mart has also been focused on expanding its private label over-the-counter meds and other health-focused items seeing opportunities from an aging population and consumers looking for health supplements, protein bars and other nutraceuticals that fits a “live healthy” agenda.

Most analysts think if Amazon can pull off a successful pharmacy program it would be big threat to CVS, Walgreens, Express Script and Wal-Mart, the four largest players in the pharmacy market, in that same order. These top four pharmacy divisions comprised 52.8% of the total pharmacy sales last year.

Keith Anderson, senior vice president of strategy and insight at Profitero, told Talk Business & Politics, the pharmacy segment is “ripe for disruption.” He said it’s comparatively high margin but jumping in would be challenging for Amazon. If successful, this would be a threat to Wal-Mart and other brick and mortar retailers given pharmacy is also a trip driver.

Anderson can understand why this category is attractive to Amazon given its size. He said there will be substantial challenges Amazon will have to overcome if it’s going to pose a threat to the major pharmacy players. He said pharmacy is a complex, opaque industry that’s well entrenched by insurers, retailers, discount programs not to mention the pharmacy benefit manager (PBM) — a third-party administrator — of prescription drug programs for commercial health plans, self-insured employer plans, Medicare Part D plans, the Federal Employees Health Benefits Program and state government employee plans.

Anderson said regulatory compliance is big and mail order prescriptions have declined over the past several years and trends show more consumers are seeking access to pharmacists. It’s also important to note that law requires prescriptions be filled by licensed and regulated pharmacists. The biggest pharmacies in the country employ their own pharmacists, something Amazon would have to do unless it partners with professionals.

Some analysts believe it makes more sense for Amazon to buy an existing pharmacy business or perhaps partner with large employers to reach a captive client base from which to begin. Mizuho Securities USA noted it would be too costly for Amazon to enter the pharmacy market without key partnerships given Amazon couldn’t offer generic discounts any higher than the industry already gives.

Anderson could see Amazon eventually integrating pharmacy with its physical stores and pick-up points as these initiative mature.

“The main barrier to entry is regulatory red tape but Amazon is tenacious when it sees an opportunity and certainly won’t give up easily,” Spieckerman said.

Anderson agreed saying he doesn’t expect Amazon to be an overnight success, but it could be another pillar for the retailer to pair along with groceries and consumables.

“This would also underpin Amazon’s continued expansion of the wallet share,” he said. “The biggest impact on Wal-Mart would be on traffic. Rx is one of the most critical trip-driving categories.”

This is not Amazon’s first stab at the pharmacy business. Amazon CEO Jeff Bezos backed Drugstore.com in the late 1990s and over a three-year period Drugstore.com sold over-the-counter products on Amazon. Drugstore.com was eventually sold to Walgreens in 2011. Walgreens shuttered the site in 2016 to focus on its own e-commerce business.