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The US healthcare industry has become gripped in recent months by the possibility that Amazon will start selling prescription drugs, creating a powerful new competitor in a sector worth $450bn a year.
Amazon has not said anything about its intentions, leaving analysts and investors to engage in a kind of corporate Kremlinology, seizing on titbits of information to gauge whether the company is plotting a move.
But the mere suggestion Amazon wants to enter the market is already proving consequential.
Many analysts cite the competitive threat as the primary motivation for a mooted tie-up between CVS Health, one of the largest drugstore operators, and Aetna, the health insurer.
Recent moves by pharmacy chains to offer next-day home delivery for medicines have also been linked to the possibility of Amazon entering the market.
It is not just the size of the opportunity that might prove tempting for Amazon, but also the chance to lower prices and disrupt an opaque industry in which it is hard to know who to blame for the soaring cost of drugs.
Just about everyone in the US agrees medicines are too expensive, but the industry is torn on who is responsible, whether it be pharmaceutical companies, wholesalers, or pharmacy benefit managers (PBMs) who act as “middlemen” between drugmakers and their customers.
“I think there’s plenty of opportunity for impactful efficiency measures to be put in place to control drug prices in this country,” says Michael Rea, chief executive of Rx Savings, which makes software to help employers and their workers cut the amount they spend on medicine.
“A new entrant like Amazon would put pressure on the pharmacies and the PBMs to do more with less.”
The Amazon speculation has made an already torrid year even worse for US drugstore chains, with investors wiping more than $40bn from the market value of the biggest operators — Walgreens Boots Alliance, CVS and Rite Aid — since the start of 2017.
Their problems include the falling price of generic drugs, which has crimped the amount the companies make per prescription, and a woeful environment for bricks-and-mortar retailers as customers move online.
“The drug retailers have a good deal to worry about because, if Amazon plays its cards right, it could offer generic drugs materially cheaper than the large players,” says Alex Schmelzer, chief executive of Mesa Rx, a pharmaceuticals cost savings consultancy.
Although Amazon has kept quiet about its plans, it has become increasingly interested in healthcare in recent months, holding meetings with industry executives and making several senior hires from insurers and PBMs.
The online retailer has cast a wide net in its search for talent; in the summer it hired Christine Henningsgaard, formerly chief operating officer of Hometeam, a New York start-up that offers in-home nursing and caregiving services for the elderly.
Amazon confirmed the appointment of Ms Henningsgaard, who has worked in healthcare since at least 2007, but declined to elaborate on her role. Her LinkedIn profile says she works on “strategic initiatives”.
The group has also invited several executives from companies operating in the pharmacy sector to its Seattle headquarters, according to two people who attended the meetings, in which participants talked about the challenges facing the industry and the high price of drugs.
Many of the conversations concerned the company’s own health plan, which covers roughly 260,000 Amazon employees, and on the options for the 90,000 workers who joined the group following its acquisition of Whole Foods Market, the upscale grocery chain.
But one person who attended the meetings said Amazon executives see the company’s health plan — which ranks among the largest in the US — as a “testing ground” that would prove useful if the company entered the pharmacy sector.
Amazon declined to comment on the private meetings.
The company has already started selling professional medical equipment, and a person briefed on its strategy said it was this part of the business that recently applied for wholesale pharmacy licences in several states.
Analysts and investors had initially interpreted the award of those licences as a firm sign the company was planning to sell drugs online, but Amazon said: “Wholesale licenses are required . . . to sell professional-use only products to healthcare customers, from medical and dental offices to hospitals.”
In the absence of hard facts, analysts and executives have speculated as to what an Amazon push into prescription drugs might look like.
Ana Gupte, analyst at Leerink, anticipates that Amazon will take on wholesalers at first, using its significant warehouse capacity and logistics experience to undercut traditional players such as McKesson, AmerisourceBergen and Cardinal Health.
“The conventional wisdom is that wholesale margins are thin, but Amazon operates on even thinner margins,” she says.
Ms Gupte thinks Amazon will then quickly turn to selling drugs to consumers, using its heft to increase the low proportion of prescriptions that are delivered through the mail, which stands at roughly 10 per cent.
“If Amazon makes the experience as transparent and friendly as it is for their other goods and services, then I think they will increase that penetration from a low base,” she says.
The company could also dispense medicines through retail pharmacies in its more than 450 Whole Foods stores, says Ms Gupte.
However, she believes Amazon will stop short of setting up its own PBM because of the significant medical expertise needed for such an endeavour. PBMs have a huge influence on the drugs that patients end up taking in the US because they control the “formularies”: the master lists of drugs that employers and the government will pay for.
By giving preferential treatment to some medicines over rivals on the formularies, while excluding other drugs entirely, the PBMs play a powerful if indirect role in the doctor-patient relationship. “I don’t think Amazon is going to get into the clinical stuff,” says Ms Gupte.
Ian Read, chief executive of Pfizer, the largest standalone drugmaker in the US, appeared to agree when he discussed the possibility of Amazon entering the market on a call with investors last month.
“Any system of distribution that can cut costs and get a wide availability of products to patients is something that the whole industry would be interested in,” he said. But he warned that entering the PBM space was a “somewhat more difficult proposal” because Amazon would be deciding on whether patients could access specific drugs.
However, some large US employers want to see Amazon do exactly that, arguing it is not possible to bring down the aggregate cost of medicines without having the power to ensure patients are actually prescribed cheaper alternatives in the first place, such as generics or rival branded drugs that cost less.
“The problem in the US pharmacy system is that too many prescriptions are being written that are not right for the patient,” says Rob Andrews, chief executive of the Health Transformation Alliance, a group of 40 large employer-sponsored health plans, including IBM, American Express and Verizon.
“Getting the wrong drug to the patient more efficiently is not the answer to that problem,” says Mr Andrews. “We don’t want to buy a discount seat on the Titanic.”
Walgreens chief ‘has unfinished business’
If Amazon does decide to enter the pharmacy industry, some observers expect the online retailer’s biggest challenge to come from Stefano Pessina, the Italian billionaire and chief executive of Walgreens Boots Alliance.
Mr Pessina sits atop one of the biggest forces in healthcare, having engineered a string of deals over several decades that saw him turn his small Italian wholesaler into a drugstore giant that owns the Walgreens chain in the US and Boots in the UK.
Stefano Pessina is said to regard his foray into the US healthcare market as ‘unfinished business’
A former associate says it would be “wrong to count him out” if the pharmacy market were to enter a period of upheaval, pointing out that the consummate dealmaker had to recently abandon a takeover of Rite Aid after it was thwarted by regulators. (Mr Pessina had to content himself with buying a chunk of his smaller rival’s stores instead.)
Another person who has advised Mr Pessina says the 76-year-old regards his foray into the US healthcare market as “unfinished business”. Although Mr Pessina has signed a string of agreements designed to consolidate the drug supply chain, he has not yet completed the kind of transformational deal that has become his hallmark.
“Stefano is a visionary guy who engages in a lot of deal activity,” adds Leerink analyst Ana Gupte.
A spokesperson for Mr Pessina declined to comment.