The US prescription drug market is a $560bn[1] per year industry that is rife with inefficiencies. Due to the large number of players involved in the drug delivery process \u2013 including manufacturers, insurance companies, pharmaceutical distributors, pharmacy benefit managers (PBMs), retail pharmacies and the end consumer \u2013 US drug pricing is incredibly convoluted. Of the 4 billion prescriptions filled in the US every year, only 12% are mail-ordered, while the rest are purchased at one of the 60,000 retail pharmacy locations[2]. Given that 70%of these prescriptions are refills of ongoing medications[3], one cannot help but wonder why home delivery isn\u2019t more prevalent.<\/p>\n
Amazon seems perfectly poised to enter and disrupt this highly regulated space by leveraging its scale, dependence on technology and its well-built logistics and distribution network. Amazon\u2019s presence would unlock several benefits for consumers, including downward pressure on prescription drug pricing, same day or next day home delivery and a better, more transparent, digitalized buying experience. Amazon would also benefit in various ways: apart from the huge financial opportunity, Amazon would gain access to large amounts of customer data that would enable it to understand its customers better and cross-sell current product offerings. The prescription drug supply chain could also be a fitting entry point into the broader >$3 trillion US healthcare industry[4], a space in which Amazon could one day be an end-to-end, fully digital provider by integrating its existing technologies.<\/p>\n
Amazon\u2019s entry into the market would affect all existing players, but PBMs and retail pharmacy chains would likely face the biggest upfront threat. In the current distribution model (Figure 1), PBMs act as middlemen by negotiating with pharmacies and drug manufacturers on behalf of health insurers. Though, in theory, this should bring drug prices down, there has been a steady increase in drug prices exacerbated by a lack of pricing transparency, which has resulted in PBMs being criticized[5] for artificially hiking prices to increase profits. PBMs also fulfill mail-order prescriptions, a process notorious for low visibility, terrible customer service and an all-round poor customer experience[6]. According to CNBC, Amazon has already taken steps in building its own PBM for Amazon employees, a task that required hiring industry expert Mark Lyons from Premera Blue Cross[7]. Whether Amazon will decide to scale its own PBM out or enter the market by acquiring an existing PBM is unclear. The benefits of the latter seem more compelling, as an acquisition allows Amazon to gain instant scale, navigate the regulatory environment, gain access to customer data that can be integrated with Amazon.com, and manage the customer experience while allowing the PBM to continue dealing with claims.<\/p>\n
To assess the feasibility of disruption, Amazon has started taking certain steps to test the waters. Amazon has reportedly been in discussions with industry experts and middle market PBMs, seeking advice from those who know the market better. Its reliance on industry insiders is further evidenced by its recent recruiting from within the pharmacy sector, including the hiring of a new general manager who is rumored to be developing a strategy to enter the pharmacy business[8]. Amazon has also started selling pharmaceuticals through Prime Now in Japan with the support of local partners[9]. Amazon has been known to test new product lines in non-US markets before rolling them out domestically, meaning the foray into drugs in Japan may be a learning experiment. In a similar vein, domestically Amazon has started selling less regulated medical supplies and equipment, recently acquiring licenses in 12 states to enable distribution[10].<\/p>\n
Despite these initial steps, if Amazon does decide to enter the pharmacy market there are many other hurdles that will need to be crossed. Historically, one of the main barriers to entry has been obtaining the appropriate licensure at both the federal and state level. Another issue is the fact that the industry is already highly consolidated, with a few key players holding long-term purchasing partnerships with each other \u2013 whether they will accept Amazon as a new entrant is debatable. Furthermore, there is the age gap to consider: though 5 out of 10 consumers surveyed by Wells Fargo claimed they would use \u201cAmazon Pharmacy\u201d if the company pursued it[11], the average age of a prescription drug user is 54 years, versus the average age of an Amazon customer of 37 years[12].<\/p>\n
These issues can likely be overcome depending on the strategy Amazon chooses to employ: it could become an online pharmacy, integrate with a PBM, add retail locations (by leveraging Wholefoods stores) or simply handle drug distribution directly to pharmacies. However, the question remains whether Amazon can or even wants to attempt to digitalize this highly complex, inefficient market.<\/p>\n
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Sources: <\/u><\/p>\n
[1] Christina Farr, \u201cAmazon is on the brink of deciding if it will make a big move into selling drugs online,\u201d CNBC, October 06, 2017, [https:\/\/www.cnbc.com\/2017\/10\/06\/amazon-considering-selling-online-prescriptions-decision-coming-soon.html], accessed November 2017<\/p>\n
[2] Robert P. Jones, \u201cIf healthcare is Amazon’s next frontier, partnership may be what the Dr. ordered,\u201d Goldman Sachs Equity Research, August 10, 2017, p.4, via Thomson Reuters, accessed November 2017<\/p>\n
[3] Ibid., p.5<\/p>\n
[4] Advisory website, \u201cCMS: US health care spending to reach nearly 20% of GDP by 2025,\u201d February 02, 2017, [https:\/\/www.advisory.com\/daily-briefing\/2017\/02\/16\/spending-growth], accessed November 2017<\/p>\n
[5] Samantha Liss, \u201cAmazon threatens to disrupt the prescription drug delivery business, analysts say\u201d, St.Louis Post Dispatch, October 22, 2017, [http:\/\/www.stltoday.com\/business\/local\/amazon-threatens-to-disrupt-the-prescription-drug-delivery-business-analysts\/article_992f0802-ce19-5bde-af80-2f1b99f4aa08.html], accessed November 2017<\/p>\n
[6] Ibid.<\/p>\n
[7] Christina Farr, \u201cAmazon is hiring people to break into the multibillion-dollar pharmacy market,\u201d CNBC, May 16, 2017, [https:\/\/www.cnbc.com\/2017\/05\/16\/amazon-selling-drugs-pharamaceuticals.html], accessed November 2017<\/p>\n
[8] Ibid.<\/p>\n
[9] Shusuke Murai, \u201cAmazon launches same-day delivery service for food and medicine\u201d,<\/em> Japantimes, April 19, 2017, [https:\/\/www.japantimes.co.jp\/news\/2017\/04\/19\/business\/amazon-launches-same-day-delivery-service-for-food-and-medicine\/#.WgzcHWhSw2w], accessed November 2017<\/p>\n [10] Stephen Buck, \u201cAmazon may indeed be getting into the pharma space but recent state license deals are not related\u201d, CNBC, October 31, 2017, [https:\/\/www.cnbc.com\/2017\/10\/31\/what-is-amazon-doing-in-health-and-the-pharmacy-industry.html], accessed November 2017<\/p>\n
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