Cowen assesses Amazon's Rx potential, marks RAD as prime acquisition target
As Amazon appears to be making moves to get into the pharmacy business — including the May hiring a senior manager of pharmacy benefits in May and the October acquisition of wholesale pharmacy licenses in 12 states in October — the question among industry players has been what form the online giant’s foray would take.
New York-based equity research firm Cowen has sized up the threat Amazon poses to the industry, and while its entry would not be as disruptive as some might think, there are still opportunities for Amazon in the pharmacy business, and Cowen suggests that some potential moves would still have a big impact — particularly through an acquisition of the Camp Hill, Pa-based Rite Aid.
“In one sense, we can view the entry of Amazon into the pharmacy market as another large chain store, or that of another mail pharmacy competitor,” the report says. “In this regard, we can see from our market model, depending on AMZN’s ability to get into retail and mail networks, there is a range of outcomes, but none suggesting retailers like CVS and WBA will be out of business.
According to data from IQVIA, Cowen notes that Amazon’s potential market size stands at roughly $203 billion in 2018, or about 43% of the U.S. prescription drug market and 62% of the American retail and mail pharmacy markets in 2018. It also doubts that Amazon would enter the specialty space, given the small patient population and accompanying services that accompany specialty drugs.
Cowen’s bull case for Amazon’s pharmacy ambitions projects the potential for it to seize a roughly 1% market share in 20189, growing to a 4% market share by 2023. This projection includes distribution through two-day delivery service Prime Now, same-day delivery service Prime Now and the company’s Whole Foods brick-and-mortar blueprint.
But a potential kicker could be Amazon acquiring Rite Aid, which would offer the company increased retail footprint. It also would bring Amazon state pharmacy licenses, infrastructure that has already cleared regulatory hurdles, potential generic sourcing options, access to retail network reimbursement contracts and $13 billion in drug spend and a small pharmacy benefits manager in the form of Rite Aid’s EnvisionRx that would open the door to mail-order, Cowen said.
“If Amazon were to launch Pharmacy in Whole Foods, on Prime and Prime Now, an acquisition of Rite Aid would accelerate market share gains and other positive benefits,” the report says noting that it wouldn’t be without its potential setbacks. “The main downside to acquiring RAD is that AMZN would inherit over 2,500 underperforming stores relative to its larger drug retail peers, which would need to be addressed.”
Even absent the challenges that the Rite Aid acquisition would bring, Cowen said that Amazon faces some headwinds to pharmacy — and that’s assuming that Amazon makes a big enough splash in the market to challenge existing supply chain players. In addition to the complexity that navigating payers and physicians would bring, Cowen highlights potential difficulty finding access to retail and mail networks, a limited sourcing scale initially and the continued integration of pharmacy into the larger care continuum.
The increased role traditional pharmacy retailers are playing in the healthcare space — particularly with regard to care and diagnostics testing increasingly provided through retail clinics — is one of protections against the Amazon threat that Cowen identifies. Additionally, the report suggests that further vertical integration in the name of care coordination and volume control could help insulate retailers — it highlights CVS Health’s rumored Aetna acquisition as a prime example. This is something that the specialty space is moving into, with Diplomat Pharmacy acquiring two PBMs in November — and Cowen identifies Diplomat as a potential takeout target for Amazon.
Ultimately, Cowen emphasizes the impact Amazon has on the established market will not be as big as initially expected, but that 67% of Prime users saying they would use Amazon pharmacy services could spur the e-retailer to take the plunge — forcing the established drug retailers to adapt.
“On a relative basis, we view the drug retailers (CVS and WBA) as facing the greatest risk, though at this point mostly from negative sentiment versus actual share loss,” the report says. “Even if AMZN were to enter, the long-term impact to shares is impossible to predict, given potential M&A and additional services the drug retailers could add that would transform their business models to something possibly wholly different.”