It was likely not a surprise for most when the news of Amazon Pharmacy hit the markets on November 17, 2020. Many people had expected Amazon.com Inc. [NASDAQ: AMZN] to further venture into the healthcare industry after the acquisition of PillPack in 2018 and the introduction of Heaven Healthcare in 2019. And yet, investors panicked on the news, selling off shares of healthcare distributors such as McKesson [NYSE: MCK], AmerisourceBergen [NYSE: ABC], and Cardinal Health [NYSE: CAH] and retailers such Walmart [NYSE: WMT], CVS Health Corp. [NYSE: CVS], Walgreens Boots Alliance Inc. [NASDAQ: WBA] and Rite Aid Corp. [NYSE: RAD]. Surprisingly, GoodRx Holdings [NASDAQ: GDRX] found itself competing against a prescription saving benefit program that Amazon planned to offer to its 90 million Prime members in the United States.
The Amazon Pharmacy is expected to disrupt the U.S. pharmacy market and lower drug prices. At this point, the idea of lower drug prices in the United States is nothing more than wishful thinking. In “The Pharmagellan Guide to Biotech Forecasting & Valuation”, Frank David, MD, PhD, Seth Robey, PhD and Andrew Matthews, MD point out that normalized drug prices in the United States is more than double the prices in Germany, Spain, France, Italy, the United Kingdom, and Japan. The problem stems from the number of players in the U.S. healthcare distribution system; pharmaceutical manufacturers have to pay a significant amount of money (in the form of rebates and discounts) to make their products more accessible to customers. The threat of disrupting the pharmaceutical distribution network, however, is very real. In the pharmacy market, CVS Health and Walgreens have 44% market share, while in the distribution market, McKesson, AmerisourceBergen, and Cardinal Health have more than 80% market share. A new market participant — like Amazon with deep pockets and an eye for efficiency and innovation — is a serious challenge to such market concentration. Having said that, Amazon will need to address many issues in order to deliver on market expectations.
To compete with healthcare distributors, Amazon needs to invest in new warehouses and supply chain systems to expand its distribution networks and to better handle pharmaceutical products. Eventually, it will need to establish strong relationships with pharmaceutical manufacturers to expand product offerings. To compete with retailers, Amazon needs to address the fact that many corporate-owned pharmacies have in-store health clinics where people can come in for blood pressure checks or flu shots or vaccines. Many people treat their pharmacy visits as mini doctor visits, especially for people who do not have primary care doctors (which is ~40% of the U.S. population).
Additionally, Amazon needs to better position itself among the payor community as the relationships among pharmacies, health insurers, and pharmacy benefit managers are well-established. This has led to suggestions that Amazon should consider buying a pharmacy benefit manager, which will be a tremendous task to take on. Catamaran, Caremark, and Express Scripts, who collectively controlled 78% of the PBM market and served approximately 180 million people in the United States, were acquired by UnitedHealth Group, CVS Health and Cigna Corp. respectively. There are smaller PBMs available on the market, but Amazon will need to consider whether such acquisition will have a significant impact on its operations.
Regarding the competition between GoodRx Holding and Amazon Pharmacy via its Prime Prescription Saving Benefit program, Amazon needs to prove that the money saved from using Amazon Pharmacy is significantly more than the money saved from using GoodRx and the $119 annual Prime membership fee, and the inconvenience(?) of switching to Amazon Pharmacy. In an interview with Emily Chang, the anchor and executive producer of Bloomberg Technology, GoodRx Holding’s CEO, Doug Hirsch, welcomed competition from Amazon but mentioned that the mail-order pharmacy market was only 5% of the total pharmacy market. Interestingly enough, on December 16, 2020 GoodRx Holding announced that it would begin to offer discounts on online doctor visits and free mail delivery via GoodRx app to GoodRx Gold members. Currently, GoodRx has approximately 4.8 million subscribers on its platform.
A successful integration of Amazon Pharmacy would significantly increase the amount spent by an average Prime member from $1,400 to $2,500 annually, which could potentially translate into an 80% growth in gross merchandise value, from $126 billion to $225 billion. Thinking beyond its pharmacy business, Amazon could offer some form of telehealth or remote health/wellness monitor services to its Prime members.