Amazon Taking On The Pharmaceutical Industry

Amazon has set its eyes on the pharmaceutical industry. It wants to both sell prescription drugs and control the pricing of these drugs, by acquiring a pharmacy benefit manager (PBM). Basically, they want to take over the whole supply chain. In the past, they have invested in Drugstore.com, which Walgreens acquired, and partnered with the pharmacy Bartell to deliver their drugs.

As a result of new reports of Amazon's interest in entering the business released on 10/06, Walgreen's and CVS shares both closed down 4.9%. Walgreens has close relationships with the PBM Prime Therapeutics - owned by Blue Cross and Blue Shield - through a joint venture called AllianceRX. Meanwhile, CVS has its own PBM called CVS Health, which is one of the largest PBMs in the US.

To take a step back, PBMs are companies that negotiate drug prices between drug manufacturers, insurance companies and pharmacies. They process the prescriptions of pharmacies, and through their network, influence insurance companies to add drugs on their formulary drug lists. Ultimately, PBMs determine drug prices by making secret deals with drug makers.

According to a consultant who talked to Bloomberg:

Amazon could bring transparency into a marketplace that is entirely lacking," said Cahn. "They are disruptive instantly if they do it differently." Cahn is a critic of PBMs' business models.

Pharmacy benefit managers are relatively new to me, but some of their negative aspects stood out to me. Apparently, they are part of the reason why in the US health insurance costs so much compared to the rest of the developed world.

Have you ever heard about PBMs? Could Amazon be a force for good in an industry where prices are secretively set by PBMs? Either way, Amazon continues to amaze. Isn't it hard to make the bear case?