{"id":26760,"date":"2017-11-15T22:52:44","date_gmt":"2017-11-16T03:52:44","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/drugs-at-your-doorstep-amazons-threat-to-cvs-health-and-the-future-of-drug-delivery\/"},"modified":"2017-11-15T22:54:02","modified_gmt":"2017-11-16T03:54:02","slug":"drugs-at-your-doorstep-amazons-threat-to-cvs-health-and-the-future-of-drug-delivery","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/drugs-at-your-doorstep-amazons-threat-to-cvs-health-and-the-future-of-drug-delivery\/","title":{"rendered":"Drugs at Your Doorstep: Amazon\u2019s Threat to CVS Health and the Future of Drug Delivery"},"content":{"rendered":"

The ongoing digitization of the pharmaceutical supply chain poses a significant threat to CVS Health. Digitization favors competitors that can dynamically manage product flows and often leads to disintermediation of static distributors.[i]<\/a> Amidst this landscape, CVS Health faces threats to its core retail pharmacy business model from Amazon as Amazon is poised to own the customer experience and information flow, create an attractive direct-to-consumer (D2C) delivery model and gain the support of key pharmaceutical manufacturers.<\/p>\n

The digitization of the care delivery system is disrupting the traditional model of patient-care and routing within the healthcare system. With the advent of telemedicine technologies, remote monitoring devices and digital diagnostics, patients can get diagnosed for conditions and be prescribed medication without stepping foot in a doctor\u2019s office.[ii]<\/a> Similarly, digital pills, such as Abilify MyCite (produced by Proteus Health and recently FDA approved) biometrically track whether medication has been taken.[iii]<\/a> If harnessed, such data streams can automatically generate prescription orders. As such, the entity that is able to own the patient experience and access and analyze such data, will have the ability to manage prescription ordering.<\/p>\n

Today, the retail pharmacy industry generates $275 billion in annual revenue, and only 1% of it is online.[iv]<\/a> E-commerce titan Amazon (which recently received 12 wholesale pharmacy licenses from state governments) is rumored to be entering the space to deliver drugs through its powerful direct-to-consumer supply chain.[v]<\/a> Similarly, start-ups like Capsule have already begun D2C prescription drug delivery in New York.[vi]<\/a> Given the low penetration of e-commerce in pharmacy and heightened consumer demand, these players are likely to take share from retail-only players like CVS.<\/p>\n

Even more concerning, these new entrants have been welcomed by pharmaceutical company executives, who believe that players like Amazon will disrupt drug distribution and remove costs from the supply chain.[vii]<\/a> If players like Amazon are able to tie consumer insights and demand directly to manufacturer supply and deliver drugs direct-to-consumer, it will set the stage for massive disintermediation of retail pharmacies like CVS. Notably, the markets seem to be reflecting these vulnerabilities as CVS Health\u2019s shares dropped 6% amidst rumors of Amazon\u2019s entry.[viii]<\/a><\/p>\n

Cognizant of these risks, CVS is taking two major steps to respond. In the short-term, they are bolstering their network[ix]<\/a> relationships with key insurance stakeholders.[x]<\/a> Given the healthcare system\u2019s transition from fee-for-service payments to value-based-care, CVS recently announced a \u201cperformance-based pharmacy network\u201d anchored by CVS, Walgreens and potentially 10,000 independent pharmacies.[xi]<\/a> By providing attractive partnership opportunities to insurers with the promise of reduced costs and higher quality over time, CVS aims to build a moat and to thwart Amazon\u2019s contracts with key insurance partners.<\/p>\n

Secondly, CVS has announced talks to buy Aetna, America\u2019s third largest insurer, in a deal that could be valued at $70 billion.[xii]<\/a> The deal and integration, which would take place over several years, is a defensive move to strengthen CVS\u2019 pharmacy position against Amazon as well as to bolster its PBM business, as insurance partners like United and Anthem have begun to vertically integrate in the pharmacy segment and develop in-house PBMs. [xiii]<\/a> By purchasing Aetna, CVS would maintain its status as an exclusive retail pharmacy partner for one of the nation\u2019s largest insurers and would stabilize its PBM negotiating leverage against large pharma. [xiv]<\/a><\/p>\n

While these steps are strong defensive moves, they fail to reflect the transformation of the pharmacy supply chain from the traditional model. CVS should recognize consumer demand for D2C delivery and offer an online delivery alternative to its retail operations. Pharmacy competitor Walgreen\u2019s has taken this approach, developing a delivery partnership with FedEx.[xv]<\/a> Secondly, CVS should push to own the customer experience and order generation. Given CVS\u2019 wide base of customers (across both its retail pharmacy and convenience stores), CVS has a strong foundation of purchasing data and customer information. Compounded with its care management and medication adherence programs run out of CVS CareMark, CVS can deepen its value proposition in helping customers to manage their health and prescriptions. This will both strengthen the affinity of customers but also enhance its value to insurers, if it can prove medical cost reductions through increased adherence. Lastly, CVS should enhance its data analytics infrastructure to augment predictability and forecasting around customer demand. This will increase the efficiency of its supply chain and prove highly valuable to both insurers and pharma manufacturing partners.<\/p>\n

Questions<\/u><\/strong><\/p>\n

What are blueprints that analagous retail organizations have followed when faced with similar threats that can shed light on CVS Health\u2019s best course of action?<\/p>\n

How can CVS best capitalize on emerging data streams from wearables and remote monitoring devices to predict demand and optimize its supply chain?<\/p>\n

(768 Words)<\/p>\n

 <\/p>\n

EndNotes<\/strong><\/span><\/p>\n

[i]<\/a> Porter, Michael and Heppelmann, James. \u201cHow Smart Connected Products Are Transforming Competition,\u201d 性视界 Business Review<\/em>, November, 2014 (Nov. Issue)<\/p>\n

[ii]<\/a> Frakt, Austin. \u201cYou Mean I don\u2019t Have to Show Up: The Promise of Telemedicine,\u201d New York Times<\/em>, May 16, 2016<\/p>\n

[iii]<\/a> Belluck, Pam. \u201cFirst Digital Pill Approved to Worries About Biomedical \u2018Big Brother\u2019,\u201d New York Times<\/em>, November 13, 2017<\/p>\n

[iv]<\/a> Lidsky, David. \u201cHow Capsule\u2019s Online Pharmacy is Riding the Third Wave of E-Commerce,\u201d Fast Company<\/em>, October 25, 2017<\/p>\n

[v]<\/a> Japsen, Bruce. \u201cAmazon Threat Subsides as Walgreens, CVS Bolster Networks, Distribution,\u201d Forbes<\/em>, October 27, 2017<\/p>\n

[vi]<\/a> Lidsky, David. \u201cHow Capsule\u2019s Online Pharmacy is Riding the Third Wave of E-Commerce,\u201d Fast Company<\/em>, October 25, 2017<\/p>\n

[vii]<\/a> Tirell, Meg. \u201cPharma Execs Would Welcome Amazon Into Drug Distribution, Say the Space is \u2018Ripe for Disruption\u2019,\u201d \u00a0CNBC<\/em>, November 1, 2017<\/p>\n

[viii]<\/a> Aiello, Chloe, \u201cCVS Stock Fall Amid Talks of Acquisition, Amazon Entering Health Space,\u201d CNBC<\/em>, October 27, 2017<\/p>\n

[ix]<\/a> Insurers select retail pharmacies to be in their networks. Patients must then go to in-network pharmacies in order to be reimbursed for their drugs.<\/p>\n

[x]<\/a> Japsen, Bruce. \u201cAmazon Threat Subsides as Walgreens, CVS Bolster Networks, Distribution,\u201d Forbes<\/em>, October 27, 2017<\/p>\n

[xi]<\/a> Japsen, Bruce. \u201cAmazon Threat Subsides as Walgreens, CVS Bolster Networks, Distribution,\u201d Forbes<\/em>, October 27, 2017<\/p>\n

[xii]<\/a> Tracer, Zachary and Langreth, Robert. \u201cAetna Gains on Report That CVS Deal Price Could Top $70 billion,\u201d Bloomberg<\/em>, November 3, 2017<\/p>\n

[xiii]<\/a> Tracer, Zachary and Langreth, Robert. \u201cAetna Gains on Report That CVS Deal Price Could Top $70 billion,\u201d Bloomberg<\/em>, November 3, 2017<\/p>\n

[xiv]<\/a> Tracer, Zachary and Langreth, Robert. \u201cAetna Gains on Report That CVS Deal Price Could Top $70 billion,\u201d Bloomberg<\/em>, November 3, 2017<\/p>\n

[xv]<\/a> Japsen, Bruce. \u201cAmazon Threat Subsides as Walgreens, CVS Bolster Networks, Distribution,\u201d Forbes<\/em>, October 27, 2017<\/p>\n","protected":false},"excerpt":{"rendered":"

CVS Health must react as Amazon is knocking at the door. 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