Six ways Amazon could reshape the pharmacy business

Use of consumer technology and its distribution channels could help retail giant grab market share.


The pharmacy market is one of the biggest potential new targets for Amazon.com.

The online retail giant moved into the roughly $800 billion U.S. grocery market in June by buying Whole Foods Market. Pharmaceuticals, a $450 billion industry in the U.S., are likewise most often sold from brick-and-mortar stores. Shoppers filling prescriptions frequently pick up toiletries, beauty supplies and dish soap—all retail items Amazon already sells. And the distribution chain for drugs has lots of middlemen whose markups Amazon can seek to undercut.

Speculation about Amazon entering the pharmacy business intensified last month, and it’s causing retail drug store chains to adapt. For example, on Monday, CVS Health said it would begin same-day delivery in several cities in early 2018, an apparent defensive move. Amazon has never commented on its pharmacy ambitions.



Drugs, which are light in weight and don’t require in-person selection, “are a perfect match” for Amazon if the online retail chain is mulling further diversification, said SSR Health analyst Richard Evans in a recent report.

Here are six ways Amazon could remake the American pharmacy market.

Use its shipping power to destroy rivals

Amazon has a massive logistics operation and could easily start its own mail-based drug delivery business, cutting out drugstores and distributors in the process.

Drug delivery would also add to the value of Amazon Prime membership. Customers who pay the $99-per-year price for Prime membership are its most loyal customers, and Amazon is constantly looking for ways to increase the value of membership to keep shoppers from using competitors. The company launched its two-hour delivery service, Prime Now, in 2014 with inventory that overlaps with the convenience items found in drug stores.

Amazon has a big emphasis on replenishment—it helps parents keep homes stocked with diapers and wipes, and it sells Dash buttons so you can reorder laundry detergent with the push of a button mounted to your washer. Drugs are an additional replenishment product that Amazon can use to go deeper into its customers’ lives—taking business away from traditional retailers such as CVS, Walgreens and Wal-Mart Stores.

Become the ultimate buyer of cheap generics

There’s no reason the e-commerce behemoth couldn’t use its buying power to offer customers cut-rate generics for cash, which would appeal to uninsured patients and those on high-deductible plans. In generics especially, there are numerous markups along the way that Amazon could eliminate or pare back to capture market share.

To gain access to the far larger market of insured patients, Amazon could cut deals with insurers that aren’t already heavily focused on mail drug delivery. This could include Humana, Anthem, Cigna and even UnitedHealth Group, according to the recent analyst note by SSR Health’s Evans. Amazon could also makes drug discount deals directly with large employers, Leerink Partners analyst David Larsen said in a recent report.

Turn Whole Foods into Whole Drugs

Now that Amazon owns Whole Foods, it has a physical presence in which it could set up pharmacies or pickup points, in addition to a mail or same-day-delivery operation. In addition to Whole Foods, Amazon could supplement this by partnering with local independent pharmacies, enabling patients to order medicines online for pickup at these stores or to have them delivered, according to Evans from SSR Health.

Make a purchase in the pharmacy industry

Amazon could buy a drug distributor or a pharmacy benefit manager, such as Express Scripts Holding, which already has one of the biggest mail-order operations.

One downside of an exclusive partnership is that competitors would probably bar plan members from filling prescriptions at Amazon, limiting potential customers. So instead of buying a PBM, Amazon could buy a specialty pharmacy, such as Diplomat Pharmacy, to help gain access to the fast-growing market for costly drugs for cancer, rheumatoid arthritis and other serious diseases, according to SSR Health.

Launch a startup of its own

Amazon already owns wholesale distribution licenses in at least 13 states and could build its own pharmacy business from scratch, restructuring the drug supply chain in the process. For now, these wholesale licenses may be part of Amazon’s business-to-business sales effort, which would focus on hospitals, doctors’ offices and dentists. In the longer term, however, the drug-distribution licenses could be the first step in building a hub-and-spoke model for drugs that could eventually serve consumers, Leerink’s Larsen wrote in his recent note.

To become a drug store, Amazon would also need to get pharmacy licenses in states to which it wants to ship pharmaceuticals. It could hire several pharmacists in each distribution center, allowing it to be licensed and serve consumers in nearby states.

Use consumer technology to improve the customer experience

Should it go into prescription drugs, one obvious priority for Amazon will probably be to improve the consumer experience in shopping for drugs online or on mobile devices. For refills, using Alexa, Amazon’s voice-activated virtual assistant, would be just the start.

There are thousands of different drugs and dosages with prices that vary widely among drugstores and insurance plans. This makes it difficult for patients to know when they are getting the best deal. Amazon could buy or partner with Rx Saving Solutions, which has an app that peers into patients’ insurance plans to help them find low-cost drugs. It could also develop programs similar to that offered by online pharmacy startup PillPack, which presorts pills into date- and time-stamped packets for patients with multiple prescriptions.

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