Quick Thoughts: AMZN’s Pharma Opportunity

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SEE LAST PAGE OF THIS REPORT Paul Sagawa / Tejas Raut Dessai

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December 4, 2017

Quick Thoughts: AMZN’s Pharma Opportunity

  • SSR Healthcare analyst Dr. Richard Evans believes that AMZN’s entry to both pharma fulfillment and plan management is realistic, with potential to transform drug distribution – see attached notes
  • Plan management would remove a limit to AMZN’s pharma share ambitions, sidestep a major cost, and increase consumer transparency – allowing lower prices and eliminating customer pain points.
  • Eliminating the PBM middleman is possible – would require buy-in from drug makers and plan sponsors who could be attracted by greater inclusion, lower distribution costs, and user benefits
  • If AMZN believes this plan is viable, they will do it – cutting out intermediaries and removing consumer pain points are core strengths of the company. We believe the opportunity could be worth $50B+ in future annual sales.

In conjunction with our colleague, health care analyst Dr. Richard Evans, we recently published a piece outlining a strategy by which Amazon might successfully enter the US pharmaceutical fulfillment market, a retail business arena with annual sales of $270B (http://www.ssrllc.com/publication/amzn-how-to-enter-and-ultimately-dominate-pharmacy-2/). We believe the case for an Amazon entry is strong, and given the company’s quiet move to gain drug distribution licenses in 12 states and strong, anecdotal reports that management has actively discussed strategies for market entry, we think the company believes the same thing. In today’s piece (http://www.ssrllc.com/publication/amzn-a-pharmacy-role-beyond-rx-fulfillment/). Richard takes the analysis further, making the case that in addition to attacking retail pharmacy with a powerful customer-friendly on-line alternative, Amazon could easily move to sidestep Pharmacy Benefits Managers, like Express Scripts or CVS/Caremark.

The biggest hurdle for Amazon in such a move would be to negotiate similar manufacturer coupons and other discounts that drug makers offer through PBMs. Richard argues that Amazon could supplant the pricing pressure wielded by PBMs, which threaten exclusion to get deals. Instead, consumers and their physicians, with much greater transparency to the costs of treatment options, would be freer to opt for lower cost regimens. Academic studies suggest that a more open market would benefit both patients and drug makers. Plan sponsors would be an easier sell. Removing intermediary costs and eliminating customer pain points are strong positives for payers. It is also likely that a price transparent Amazon platform would give plan sponsors much more flexibility in designing drug formularies for their covered users.

By cutting PBMs from the flow chart, Amazon would simplify the currently complex web of business interests involved in supplying pharmaceuticals to patients. This is classic Amazon, and would allow it to pass considerable savings to customers – as would its world-class fulfillment platform for efficient home delivery. Amazon is also about relentlessly improving its customers’ experience. There is no question that it could improve upon kludgy on-line pharmacies that will only ship 90 days of doses at a time because they can handle 30 day supplies economically. In our previous piece, we detail other ways in which Amazon could make fundamental improvements to drug distribution. Today’s piece makes the economic impetus more compelling.

The pharmacy is the margin driver for the retail drugstore, offering 15-20% gross margins. Add in profits from independent distributers and, now, PBMs, and the addressable profit pool for Amazon is likely in the tens of billions of dollars. We would not be surprised to see a major move to compete for it play out in 2018.

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