Amazon’s interest in pharmacy raises retail concerns

The question on the minds of many in the drugstore, pharmaceutical and healthcare industries is once again what to do about Amazon’s visible interest toward prescription medication and medical devices, a nearly half-trillion-dollar opportunity for disruption.

Amazon has secured wholesale pharmacy licenses in 12 states, with one pending in Maine. The Seattle-based tech/retailer said in a regulatory filing it is not interested in selling prescriptions in Tennessee or Indiana, two states where it has already obtained licensure.

Amazon said it now plans to focus on selling medical devices and supplies. However, Amazon has secured wholesale pharmacy licenses in Alabama, Arizona, Connecticut, Idaho, Louisiana, Michigan, Nevada, New Hampshire, New Jersey, North Dakota, Oregon and Tennessee. Many in the drug store and pharmaceutical industry expect Amazon will eventually delve into prescription drugs.

Earlier this year Amazon hired Mark Lyons from Premera Blue Cross to reportedly build an internal pharmacy benefits manager program for Amazon employees, which could later be rolled out.

MARKET OPPORTUNITY
Harry Travis, pharmacist and CEO of EtectRX, said everyone in the sector is on alert.

“I believe they [Amazon] are going to get into this business,” Travis said recently while speaking at the Northwest Arkansas Technology Summit in Rogers. “There are 4 billion retail transactions at an average of $30 each that can be disaggregated from the insurer if they do it right. I can’t imagine that Amazon is going to miss this opportunity. We will see what happens, and word is Amazon will likely make some announcement by Thanksgiving on this issue.”

The Drug Store Institute estimates U.S. prescription revenues topped $412 billion last year. Wal-Mart and Sam’s Club commands about 5% of that market share worth an estimated $20.6 billion as of last year. That ranks the retail giant fourth. CVS Health commanded the largest share at 14.8% or $61.1 billion and Walgreens was No. 2 at 13.8% or $56.8 billion. Express Scripts mail order business was the third largest with 10.6% or $43.9 billion in revenue. It is estimated that 90% of transactions take place in 50,000 retail stores.

Jason Long, CEO of Shift Marketing in St. Louis, told Talk Business & Politics-Northwest Arkansas Business Journal, the prescription pharmacy business is not without challenges, but Amazon is putting in brain power to figure it out.

“There are some opportunities for Amazon in this space to grow its Prime membership with the draw of low-priced prescriptions delivered with the speed Prime members enjoy,” he said. “Pill bottles are light in weight, and there’s no brand to pick since the [prescriptions] are written by doctors. It seems to fit right in Amazon’s wheelhouse.”

He said there’s a generation of senior citizens who could benefit from low-cost drugs delivered to their doorstep. He adds many might not be Prime members. He said Amazon could partner with pharmacies in remote areas to serve outlying communities.

Carol Spieckerman, CEO of Spieckerman Retail, also believes the pharmacy business is inevitable for Amazon. She said it brings several opportunities, all perilous for competitors as Amazon has redefined convenience in multiple categories which keeps its Prime members from shopping as often in retail stores. She agreed there’s a possibility for Amazon to partner with brick-and-mortar retailers to augment home delivery with in-store pickup — potentially through additional Amazon locker set-ups — or to go on a brick-and-mortar buying spree of independent pharmacy operators or even a big player.

“Whole Foods could easily come into the picture as part of the overall distribution network,” Spieckerman said. “Re-orders through Amazon Echo would be a given.”

Retail analyst Deborah Weinswig agrees Amazon likely sees pharmacy as another convenience play.

“Alexa, re-order my Lipitor,” she said, in describing how seamless the process could be.

Keith Anderson, vice president of strategy for Boston-based Profitero, said there are many ways Amazon might tackle the complicated pharmacy sector. A more interesting aspect would have Amazon partnering with or becoming a pharmacy benefits manager (PBR) — a third-party administrator responsible for contracting with pharmacies, negotiating discounts and rebates with drug manufacturers, and processing and paying prescription drug claims.

Anderson said the three largest PBMs control 80% of the pharmacy business, and this is where Amazon could make a dent in the industry. He said like web services, it would be something Amazon could monetize by selling the service to other industry players.

RETAILER RESPONSES
Spieckerman said Amazon’s move into pharmacy is not without concern.

“Drug companies may initially see this as an opportunity to gain wider distribution, but like many Amazon suppliers [they] may soon awaken to the margin implications as Amazon seeks to grab major market share early on,” Spieckerman said. “Generics could provide the first line of offense for Amazon which could woo uninsured patients or those on high-deductible plans. Once established, nothing would stop Amazon from forging direct deals with large employers.”

Weinswig also expects Amazon to use its scale to negotiate better drug prices with pharmaceutical companies and reduce margin for everybody else in the process. She said consumers would likely benefit from lower prescription drug prices in addition to the convenience perks, but drug companies and retailers would be squeezed.

Anderson said the best case scenario for Amazon to create a real disruption in the sector will likely take up to five years, and it would take that long for Amazon to get a foothold. He said retail pharmacies need to evaluate their business now to see if they are merely traffic generators or also a profit center and devise a plan to address perceived threats.

He said Kroger began innovating more than two years ago to shore up its pharmacy business. For example, it integrated their mobile app and was able to grow that business. Anderson expects to see others mount a defense in the coming months.

Spieckerman said existing drug retailers have little recourse and some of the changes they are already making could make some less competitive.

“CVS has announced a somewhat cautious rollout of same-day drug delivery in a few markets going into 2018,” she added. “On the surface, this would seem to offer a welcome convenience option to CVS customers, but the move limits CVS’ ability to drive the incremental sales tied to in-store wait times. In the meantime, Amazon’s ever-more-intuitive recommendations engine and Prime membership would ensure that many shoppers will throw extra items into their Amazon shipments.”

Wal-Mart recently tweaked the prescription pickup process in its store pharmacies by instituting an “express lane” feature for shoppers who use the retailer’s mobile app for refills. Customers who use the “express lane” for prescription refill start the process with their mobile app. Once they arrive at the store, they move to the front of the line to pick up their order, which must be paid for using Walmart Pay, the retailer’s mobile system.