News that Amazon will spend $13.7 billion to buy brick-and-mortar grocery chain Whole Foods Market Inc. has resurrected talk the online retailer will eventually get into the drugstore business as well.
While there are doubters Amazon could simply jump in on its own to compete with CVS Health or Walgreens Boots Alliance in the highly regulated pharmaceutical and drug benefit business, the Whole Foods deal shows the online retailer’s openness to buying its way into a new industry. And that’s what it would likely take for Amazon to compete with Walgreens and CVS in the highly regulated and complex healthcare industry.
“Based on Amazon’s acquisition of Whole Foods, we are more convinced Amazon would need an acquisition in order to overcome regulatory and payer hurdles, gain access to the customer … and sourcing,” Ann Hynes at Mizuho Securities USA wrote in a note Monday.
Walgreens awaits word from the Federal Trade Commission on whether the federal government will approve its purchase of Rite Aid or the deal is headed to potential litigation as some are speculating. The FTC decision on the Walgreens-Rite Aid merger is expected within the next month on a complicated deal that involves divesting up to 1,200 Rite Aids to Fred’s Inc., a discount retailer operating stores in 15 southeastern states.
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Without an acquisition of perhaps Rite Aid, it’s going to be tough for Amazon to be successful in the business of filling, dispensing and managing patient prescriptions. Walgreens, CVS and Wal-Mart Stores Inc. have ties to health insurers and medical care providers that have footholds in their markets. CVS also owns one of the nation’s largest pharmacy benefit management (PBM) companies, which competes with Express Scripts and UnitedHealth Group’s OptumRx.
“On the PBM Side, the three largest players each process over 1 billion claims annually,” J.P. Morgan analyst Lisa Gill wrote last month. “Importantly, the scale they have aggregated allows them to negotiate attractive rebates/discounts with manufacturers and attractive reimbursement terms with retail pharmacies.”
But Rite Aid does operate a PBM, EnvisionRx, and has relationships with government and private health insurers as well as employers. Amazon getting into the PBM business on its own would otherwise take years to form closer ties with health insurers and employers looking at better ways to coordinate the delivery of medical care.
The trend in healthcare is toward value-based models and population health that require Walgreens, CVS and other pharmacies to have relationships with doctors and other providers in the community that have existed for decades. Payment reform under the Affordable Care Act and related efforts pushed by Medicare, Medicaid and private insurers are moving to population health.
“Acquisition would likely need to be the vehicle into the market if Amazon enters pharmacy,” Mizuho Securities analysts said. “CVS and Walgreens would be monster deals for Amazon. Rite Aid is a real possibility but we are still not convinced Amazon is interested in entering a highly regulated market like pharmacy.”
Furthermore, it could take another year or so before Amazon could buy through acquisition if the Walgreens-Rite Aid deal ends up in litigation.
But analysts say it took Amazon a decade before deciding to jump into the grocery space.
“Based on our analysis, AMZN has been contemplating the grocery space for over a decade before buying Whole Foods, had several pilots testing the market place and consistently discussed on earnings calls how this was an area of focus for the company,” Mizuho’s Hynes wrote.
Date:June 20, 2017