Amazon Taking On The Pharmaceutical Industry

Yossif's picture
Rank: Senior Orangutan | 422

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?

Comments (10)

Oct 9, 2017

Worked in the area.

It isn't PBM's and the Big 3 who need to be worried. It's GPO's. Pharma has some of the most astoundingly stupid procurement practices in any industry to the point where your average health system has absolutely no idea what they're paying for any drug.

The reason none of it changes is because there's a rampant "This is how we've always done it" mentality and they generally only care about their year zero budget. Amazon is a potential disruption because of the name brand equity: the average stupid business manager is very impressed with Amazon's brand name and will suddenly be much more open to changing their existing practices when you drop that name.

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Oct 9, 2017

huh?

Oct 9, 2017

Basically what I'm saying is that there are MUCH better deals than the status quo out there for pharma buyers, but they won't budge because those purchasing managers are extremely set in their ways. The only thing that might change that is somebody with huge brand-name recognition like Amazon pitching to be their supplier.

Oct 10, 2017

Very interesting - I feel like this is all super complex. I always thought GPOs set their own prices. Is what you're saying that PBMs and GPOs largely work together? Also how do the Big 3 distributors factor into this network?

BTW do you mind telling me how you worked in the area? Are you in pharma management, a specialist working in finance, or simply in an industry group at a bank? Would love to know because I am interested in entering the sector too.

Oct 10, 2017

No. I'm saying that the GOP's are utterly incompetent and are not adding any significant value in exchange for the services they provide. Most do not enforce compliance (with contract terms, for those unfamiliar with it reading this thread) whatsoever and there isn't an appreciable price advantage.

Source: did some temp work for a potential disruptor in the industry while waiting to start.

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Best Response
Oct 10, 2017

keep in mind the elephant in the room....the US government. The government guarantees that it gets the best price (literally "Best Price Paid") on any medications in the US. This is extremely complex with teams of people processing the effects of rebates, giveaways, etc...

This is a huge focus for pharma companies and I just don't see Amazon having enough power to break this mold. I highly doubt that Abbvie is going to give Amazon a 10% discount on Humira, which will then jeopardize the other $16B in sales they have a year.

I'm not saying that this is the way it SHOULD be, but it is our reality. Taking that a step further, the reality is that the american consumer essentially funds most medical R&D through our inflated prices (or our tax dollars paying for other's inflated prices). If we paid substantially less, margins would deflate drastically and we'd eventually see less medical R&D.

Amazon may be able to shave a few % off logistics expenses and save consumers some $, but my perception is that this area is relatively lean already and not where you'd bend the cost curve.

twitter: @CorpFin_Guy

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Oct 10, 2017

It's extremely lean for the Pharma end of the business. Margins for distributors and related businesses are huge.

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Oct 10, 2017

Yes and that's where Amazon can make their $ (although I guess this assumes that Amazon is going to try to make $). If prices dont come down there's little benefit to the consumer and not an overly compelling reason for Amazon to get into the space.

twitter: @CorpFin_Guy

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Oct 10, 2017
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