The Amazon question: How the online giant could shake up the Rx landscape

Though CVS Health and Aetna have had a working relationship since 2010, and their pending merger had likely been in the works for some time, its timing, experts say, suggests that the merger is as much about staving off the looming threat from Amazon as it is about competing with top health insurers and retailers.

“The merger of CVS and Aetna is likely anticipatory positioning in the face of a looming competitive threat from Amazon, which is expected to enter the prescription drug market after reportedly acquiring pharmacy licenses in at least 12 states,” Deborah Weinswig, managing director of New York City-based retail think tank Fung Global Retail & Technology, said when the merger was announced. “In our view, this merger announcement is likely the first of many to come between pharmacy companies and insurance companies.”

Indeed, Amazon seems to be closing in on some sort of pharmacy entry. The company last March hired Premera Blue Cross veteran Mark Lyons as its senior manager of pharmacy benefits. The company also reportedly acquired wholesale licenses in 12 states, and continues to apply across the country. However, while a November analysis by New York City-based financial services firm Cowen suggested that such moves indicate an interest in distribution — which would put Amazon in competition with such players as AmerisourceBergen, Cardinal Health and McKesson — the company seems to be indicating that its interests lie elsewhere.

“In Massachusetts and Indiana, it’s told regulators it’s not going to ship drugs, it’s not going down that path,” said Dave Raiford, senior director of market access insights at Burlington, Mass.-based healthcare research and consulting company Decision Resources Group. “It’s interested in medical devices, which I think is an easier entry point for them. It’s a little less rigid in terms of the regulatory aspect. They’ve also pulled back in Maine.”

Cowen’s report, “Amazon’s U.S. Pharmacy Opportunity,” suggested another angle of approach that meets Amazon’s needs of avoiding as much regulatory headache as possible — an acquisition of Rite Aid that would bring the online giant into the world of brick-and-mortar retail pharmacy in much the same way its Whole Foods acquisition made it a grocery player.

Cowen noted that the main achievement of a Rite Aid acquisition would be infrastructure that already passes regulatory muster, gaining six distribution centers and roughly 2,500 stores. The distribution centers would offer DEA-compliant storage and distribution of controlled substances, among other licenses that Amazon would need to acquire if it wanted to build out pharmacy offerings in its existing retail footprint.

“If you think about it, going the retail pharmacy route, that would [require] a build out,” DRG’s Raiford said. “Not that Amazon certainly doesn’t have the resources to do that it if wants to. It already owns Whole Foods, so it has a presence where it could add pharmacy. It probably is more likely that if it did go the route of retail pharmacy, an acquisition of Rite Aid, which also has the EnvisionRx component gets it there a little bit faster.”

Like Raiford, Cowen noted that in addition to infrastructure and a retail footprint, Rite Aid would bring Amazon a PBM of its own — opening the doors to small-scale mail-order pharmacy. This possibility is why such analysts as Raiford suggest Express Scripts as another potential acquisition target, though Cowen noted that it would require a more substantial financial commitment. Kantar Retail vice president Brian Owens, who leads the Norwalk. Conn.-based company’s health and wellness and drug channel research, noted that a pharmacy entry would only build on the ways that Amazon already plays in health care — on the retail side, it’s a top seller of health and beauty products, and on its AWS side, it offers technical support to payers and government agencies.

“I want to be clear — the CVS-Aetna deal is not an overreaction to Amazon potentially coming into the pharmacy space in a more meaningful way,” Owens said. Indeed, if Amazon were to acquire Rite Aid, Cowen noted that it would bring Amazon access to reimbursement networks that, alongside its existing capabilities, would make it a true threat to the existing order in retail pharmacy.

“We think RAD’s remaining footprint of 2,575 stores, along with Prime home delivery, Prime Now and pharmacies integrated into existing Whole Foods locations, would essentially provide AMZN with nationwide coverage, positioning it as a viable partner for payers in establishing preferred, narrow pharmacy networks, which we think would be crucial in establishing AMZN as a legitimate player in the retail pharmacy market,” Cowen said.

And while Cowen noted that acquiring Rite Aid would bring it stores that generate roughly 23% less revenue and 79% less EBITDA than CVS Pharmacy stores, the acquisition also could give Amazon the ability to participate in Walgreens Boots Alliance’s generic purchasing consortium.

This means that in this scenario, Walgreens would be partnering with a key competitor in a way that would help it continue to build out distribution capabilities — the company owns a nearly 25% stake in AmerisourceBergen— as a way to influence price. Walgreens Boots Alliance also is continuing to build out its global footprint, adding a 40% stake in Chinese chain GuoDa Drugstores to its ownership of Boots in the United Kingdom and various other international chains.

“[Walgreens is] playing more on the wholesale side, and being able to understand how the flow of prescription drugs is facilitated globally,” Owens said. “If they have a global footprint and the more they’re able to acquire more points of commerce from a pharma standpoint …, it allows them to have the ability to influence how prescription drugs are flown, and potentially the cost of them as well.”

If Walgreens succeeds, it would mean better prices for its partners, which likely could include Amazon. This would be the biggest example of an increasing trend that also could help retailers stay competitive in the face of an Amazon threat, namely, increasing numbers of partnerships among what Owens calls “frenemies.” Such alliances as CVS Caremark’s performance-based network that’s anchored by CVS Pharmacy, Walgreens and independent pharmacies is just the most recent example — and certainly not the last. 

Fighting off Amazon will ultimately come down to the retailers’ abilities to leverage its capabilities — even if it means forming a team of rivals to do so. “I think there’s always going to be a place for everyone to play,” Owens said. “It comes down to less about trying to acquire more lives and more about how profitable you can make it with the resources you have and people you service.”