Amazon takes a big step into online pharma

FOR roughly a year speculation has been feverish: would Amazon, an online retail giant, muscle into America’s prescription-drugs market? On June 28th that uncertainty ended when it bought a small online pharmacy, PillPack, based in Manchester, New Hampshire, for about $1bn. When the deal is completed later this year, Amazon will be able to sell prescription drugs to customers in the 50 states where PillPack has licenses.

The news of Amazon’s entry had a predictable effect on incumbent firms. Shares of three large bricks-and-mortar pharmacy chains, Walgreens Boots Alliance, Rite Aid and CVS Health, lost $11bn in value. Drug distributors such as Cardinal Health and AmerisourceBergen were also hit. Amazon gained $19.8bn. Michael Rea, boss of Rx Savings Solutions, a health-technology firm, says the purchase increased the speed with which Amazon can get into the prescription-drug market, making slimmer profit margins “imminent”.

In the short term Amazon is unlikely to take more than a sliver of the $453bn Americans spend on prescription drugs. Last year the vast majority of prescriptions were picked up in person. But if Amazon can simplify the process of filling a prescription at the same time as offering cheaper prices, it could up-end the selling of medicines in the same way it has with books, toys and clothes.

Fear of what might be taking shape in the mind of Jeff Bezos, Amazon’s boss, has already encouraged health-care firms to join forces. CVS is undertaking a $68bn tie-up with Aetna, a health insurer. Cigna, another insurer, is doing a similar-sized deal to buy Express Scripts, a pharmacy benefit manager, an intermediary which negotiates drugs prices on behalf of insurers and employers. New services are also being created. CVS is starting to offer same-day delivery of prescriptions. Both it and Walgreens intend to provide medical services in more stores. Walgreens aims to roll out blood tests for medical conditions.

Buying PillPack is not Amazon’s first foray into health care. It already sells over-the-counter medicines such as aspirin and antihistamines in America, alongside vitamins and supplements. It launched its own line of generic medicines called Basic Care last year. It sells medical supplies such as face masks and swabs, and wants to expand into supplying hospitals and clinics.

Amazon is also part of a three-way joint venture with JPMorgan Chase, a bank, and Berkshire Hathaway, an investment firm, to create a non-profit health-care venture. On July 9th Atul Gawande, a surgeon, writer and professor of medicine at Harvard, will start as the boss of the as-yet unnamed firm. Mr Gawande has said the venture will target excessive administrative costs, high prices and improper medical care (such as over- and underuse of specific drugs and treatments). It will initially be aimed at the three firms’ combined 1.2m American employees.

If it is really serious about disrupting the American health-care system, some think that Amazon will end up having to buy, or create its own, pharmacy benefits manager. Amazon may also need a way of managing electronic medical health records as well as doing the sorts of analytics on health-care data that will allow it to wring greater efficiencies out of a notoriously bloated system. And the firm could choose to open or buy retail pharmacies, or even become a wholesale distributor of drugs. No wonder its rivals fear being killed, not cured.