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Amazon Forays Into Pharmacy Business: Red Alert for Others?

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Putting an end to speculations, Amazon.com, Inc. (AMZN - Free Report) has finally stepped into the high-potential pharmaceutical industry. In line with this, the online retail behemoth recently announced a definitive acquisition agreement with PillPack. Although the terms of the deal have been kept under wraps, a few market experts estimate the value of the transaction at $1 billion.

This news was heavily cheered by investors, sending Amazon’s share price 2.5% higher on the day of the announcement.

Does Amazon’s Entry Spell Doom for Pharmacies?

Although Amazon’s entry into the pharmacy business was well speculated, it still came as a shocker for industry bigwigs. Let’s take a closer look at the reactions of some of the behemoths.

Amazon.com, Inc. Price

 

Beginning with, Walgreens Boots Alliance, Inc. (WBA - Free Report) , which has been basking in the glory of being added as the youngest member to the Dow Jones Industrial Average Index, saw a 9.9% decline in stock price on the day of the buyout announcement. The company also saw a rating downgrade by a number of analysts.

Walgreens Boots Alliance, Inc. Price

 

The stocks of other big retailers like Rite Aid Corporation (RAD - Free Report) and CVS Health Corporation (CVS - Free Report) also slipped around 11.1% and 6.1% on the same day.

CVS Health Corporation Price

 

Per reports, three of these bigwigs collectively lost about $12.8 billion in market value on the day.

Rite Aid Corporation Price

 

Major drug distributors like Cardinal Health, Inc. (CAH - Free Report) , AmerisourceBergen Corporation (ABC - Free Report) and McKesson Corporation (MCK - Free Report) also panicked, with stocks falling a respective 4.8%, 4.1% and 6.1%.

How Rational is the Deal for Amazon?

In an era where brick and mortar set ups are being challenged by online sellers, though Amazon’s entry into the prescription drug industry is welcome news for consumers, it is also fraught with challenges.

Coming back to the buyout, PillPack is an online pharmacy that pre-sorts medications into different doses and handles both refills and renewals. It also holds pharmacy licenses in all 50 states and has URAC and VIPPS accreditation. It is an in-network pharmacy with most pharmacy benefit managers (PBMs) along with major Medicare Part D plans.

Per an article on STAT, the integration of PillPack will help Amazon become a major player in the $370-billion drug business.

Some analysts believe that with PillPack, which is working with Medicare plans, Amazon will be able to see an increase in its Amazon Prime membership of the rapidly-growing age group of 65 and above. There are high chances that 100 million Prime subscribers with Amazon will choose the company for their prescription drug needs.

However, the deal has come with its own set of challenges. Per an article published on PYMNTS.com, PillPack sources products from AmerisourceBergen and Walgreens Boots. Further, per the same article,  there were rumors in the recent past about Walgreens Boots’ plans to buy AmerisourceBergen, which might pit Walgreens Boots against Amazon in the space.

PillPack’s in-network membership with Express Scripts is also subject to renewal at the end of July. It is being speculated that if Amazon appears to be a formidable threat to the PBMs they might start refraining from renewing the in-network memberships in future (per an article published on PYMNTS.com). With regard to this, Amazon had to let go of its 40% stake in Drugstore.com as PBMs denied to include Drugstore.com in their networks. This  eventually resulted in Drugstore.com exiting the prescription business (per an article published on AXIOS).

How Bad is the News for Pharmaceutical Giants?

"You've got to keep reinventing. You'll have new competitors. You'll have new customers all around you."

Nothing could more aptly sum up this situation than this remark by Ginni Rometty, IBM CEO. The incumbent players in the drugstore industry don’t seem to be in a mood to give up and lose their turf. To counter competition, CVS Health, Walgreens Boots and others have started to add more digital and customer-friendly programs. These companies have incorporated mail order pharmacy models to their stores with same day/one day to two days delivery programs.

Further, CVS Health’s deal with United States’ third-largest health insurance company, Aetna, will fortify its position in the industry.

In a bid to ensure availability of specialty brand drugs, Walgreens Boots has tied up with Express Scripts and has announced plans to expand existing group purchasing efforts. Per reports, Walgreens Boots is also collaborating with a number of healthcare businesses, including health insurers like Humana and UnitedHealth Group.

The company is also partnering with lab testing provider Laboratory Corporation of America Holdings to expand the range of health services at its stores.

Further, some analysts believe those preferring cash payments are expected to opt more for Amazon’s pharmacy services. The percentage of this population is quite nominal. Moreover, patients with the need for immediate drugs will approach stores over waiting for online delivery.

Considering these factors, major analysts believe there is enough scope left for these behemoths to maintain a competitive edge in the space.

Summing Up

Amazon’s entry has definitely created an upheaval in the prescription drug industry with major players struggling to keep afloat. However, in business, bankable human resource and strong financial position matter the most. And Amazon has an adequate amount of of both. So, the following quote from Neil Saunders, the managing director of GlobalData Retail, Reuters suitably sums up the current scenario — “Amazon’s acquisition of PillPack is a warning shot in what is about to become a major battle within the pharmacy space.”

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