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Amazon Pharmacy tests low-volume mail-order sector: Analysts

Amazon’s new pharmacy service, while not surprising, increases pressure on brick-and-mortar pharmacies which have already been impacted by the global pandemic this year.

Amazon (AMZN) Pharmacy is the latest move from the e-retail giant after it acquired mail-order startup Pill Pack for $750 million in 2018. The service, offered in 45 states, includes discounted drug prices as well as payment through insurance, cash and health savings accounts. Prime members will get free two-day shipping, while non-Prime members can pay $5.99 for the same. The service also allows discounts to be applied to traditional pharmacies.

Key components of the strategy rely on the Prime member network and Cigna’s (CI) spinoff Evernorth, and ExpressScripts, for the discount program— which can also be used at traditional retail pharmacies.

Like GoodRx (GDRX), Amazon is offering discounted prices if patients choose to pay without insurance — which offers both the opportunity to price compare as well as open the door to convenient prescription ordering for the uninsured— a typically low-volume market for drug manufacturers.

“If they are negotiating rates on drugs … it sort of becomes a PBM [pharmacy benefits manager] for uninsured people,” said Craig Garthwaite, professor of strategy and director of the Program on Healthcare at Northwestern University’s Kellogg School.

Garthwaite told Yahoo Finance that the announcement is less of a disruption and more of an additional competitor in the space.

Close-up of logo for Pill Pack by Amazon Pharmacy on white paper, San Ramon, California, December 15, 2019. (Photo by Smith Collection/Gado/Getty Images)
Close-up of logo for Pill Pack by Amazon Pharmacy on white paper, San Ramon, California, December 15, 2019. (Photo by Smith Collection/Gado/Getty Images)

Amazon’s delivery network is already so robust that it can outdo other pharmacies since the “cost of delivering and marginal cost of startup is less than its competitors,” he said.

JPMorgan analysts said Tuesday that the news is hardly a surprise and is unlikely to be a true disruption for multiple reasons, including its target customer base.

“We don’t believe Amazon has a specialty solution at this point, which combines fulfillment with clinical capabilities (note that specialty currently represents roughly half of total prescription drug spend),” analysts noted, adding that the cash pay market is just under 5% of the overall prescription market.

What remains to be seen is whether or not it boosts Prime membership, and if it can capitalize on mail-order, which has traditionally had low pickup.

“Each of the large PBMs has offered mail pharmacy services for over 30 years. Interestingly, despite convenience, mail utilization has actually been steadily declining per data from IQVIA data … mail accounted for just 5% of total adjusted scripts in 2019, down from double-digit levels a decade ago,” according to JPM.

But because of the pandemic opening up access to and experience with virtual health care, as well as the behavioral changes in consumers online, analysts at Morgan Stanley believe the company could do well.

On one hand, Prime does not have as strong penetration into the 55 and older population, but if it prices competitively enough it might increase adoption, the analysts wrote.

“It is important to remember though that while Amazon clearly brings a refreshed competitive dynamic to the market, mail pharmacy is still only a piece of the market, representing less than 20% of current total scripts,” Bank of America analysts noted Tuesday.

Others say the pickup of the service is likely to be slow, as has traditionally been the case when Amazon enters a new sector.

Goldman Sachs analysts noted “it typically takes several years before AMZN gains meaningful market share in new end-markets. We also think there is some convenience factor to being able to pick up acute scripts same day from a pharmacy.”

But some analysts believe the move could be major disruption

“The news represents a disruption to the system and competitive threat that will likely shift scripts away from the retail channel, in our opinion,” said Citi’s Ralph Giacobbe in a note Tuesday, adding that Cigna is also likely to benefit.

“Evernorth could directly benefit from this relationship should prescriptions that were filled at pharmacies not contracted with Evernorth as their PBM previously shift over to Amazon Pharmacy and use the cash-pay instead of insurance to generate the savings,” he said.

Generally, analysts believe CVS (CVS) and Walmart (WMT) are best-poised to compete with Amazon in the space, considering their scale and diversity. Walmart has had $4 generic drugs for more than a decade and has recently launch a number of clinics. CVS has moved away from solely being a pharmacy and PBM into being a health care provider with clinics, long-term care services and the recent acquisition of insurer Aetna.

What remains a question is the economics of the operation for Amazon, and potential future changes. Analysts wonder if the company will get a cut of the discounts, as is the practice in the industry, and if the new service is more of a learning process for Amazon to eventually compete directly with PBMs.

As Oppenheimer analysts noted, “Overall, though the details are still scarce, the long-anticipated announcement by Amazon continues its push into the pharmacy space that should continue to disrupt the supply chain.”

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