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Will Healthcare Buck Up on Amazon's Pillpack Takeover Deal?

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The much followed and widely speculated entry by, Inc. (AMZN - Free Report) into pharmacy business has now been put to rest with the company’s announcing that it will purchase PillPack, an online pharmacy delivery company.

Eying an Attractive Market

The purchase of PillPack for $1 billion would provide Amazon instant access to the U.S. drug business worth nearly $370 billion. Close on the heels of the news, shares of pharmacy companies CVS Health Corp. (CVS - Free Report) , Rite Aid (RAD - Free Report) , and Walgreens Boots Alliance (WBA - Free Report) nosedived on concerns that the entry of the giant company Amazon might take away market share from them. Other companies UnitedHealth Group Inc. and Humana Inc. having Pharmacy Rx business and would be affected by Amazon’s presence and lose value.

Amazon already sells medical supplies and equipment like blood pressure monitors, braces, hearing aids, and even walkers and wheelchairs in the United States. Entering the pharmacy industry therefore was like the next best step to expand in the healthcare space.

Amazon’s entry into drug distribution would definitely be a game changer but the immediate implications will be more limited, given that the healthcare space is highly complex and regulated.

The U.S. drug industry is opaque and divided into specific tranches such as drugmakers that make drugs, PBMs that negotiate drug prices with manufacturers, processpharmacy benefit claims, and operate home-delivery pharmacies. Down the line are wholesalers, who physically distribute drugs to pharmacies and hospitals and at the bottom are the retail pharmacies.
Complex arrangements between these different players and consolidation in the space have led them to rake in profits with the end consumers facing the fall out of the rising drug prices. Amazon, with its digital capabilities and huge logistics force, is aiming distribute drugs at a low cost.

In a year's time, the Retail Drug Store industry has lost 11.8% compared with the S&P 500 market’s growth of 1.9% and a decline of 1.92% for the Medical sector.

One Year Price Performance


What Next?

Now, Amazon must have a pharmacy benefit manager in order to have an end-to-end solution. Thus the company might opt for a PBM alliance or acquisition. Any news to this tune from the company should not be surprising. It is but sure that the company will not rest here and will make further moves in other spaces of healthcare since its CEO’s has vented his frustration over an inefficient and costly U.S. healthcare system. To this end, recently, Amazon along with Berkshire Hathaway and JP Morgan formed a healthcare venture to provide health insurance for their employees which together is more than a  a million. Late last month, the venture got its CEO Dr. Atul Gawande, implying that it is well on track to start operations.

The Threat

Amazon is known for becoming a formidable figure by garnering huge market share of any industry it lays its hands with innovative market practices and skilled leadership. So far, it has carved a niche in businesses like books, retail, supermarkets, consumer electronics and cloud computing among others.

So, Amazon’s pharmacy plans surfaced last year, the existing players in the space buckled up. In a retaliatory measure, CVS went on to acquire Aetna Inc. and Express Scripts sought partnership with Cigna. Also recently Walgreens entered into agreement with Humana to set up primary care clinics which would expand its pharmacy services and expertise.

While Amazon is unlikely to give traditional healthcare companies a run for their money in the short term, they definitely will have to revamp business strategies to make use of technology, data and analytics to offer better products and customer-friendly services. The whole drill should modernize the healthcare system and give investors more reasons to keep a close tab on it.

Close on the heels of Amazon’s news, the FDA chief said that disruptive competition is good thing any change that makes much-needed products more accessible to consumers and lowers cost is welcome.

Ana Gupte, senior health care services analyst at Leerink Partners, advised clients to keep in mind that Amazon's push into the pharmaceutical space won't happen over night and that this is going to take a long time. But the threat that Amazon's share will grow over time looms large.

We believe that it will be like walking a tight rope for the incumbent players.

Zacks Rank

Among the companies mentioned above, Aetna Inc. (AET) Express Scripts, CVS Health and Amazon each carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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