The Specter of Amazon Rx

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Shares of Rite-Aid and CVS initially plummeted on rumors of Amazon’s possible move into pharmacy. Surprisingly, however, their stocks prices have recovered of late, trading places with major medical distribution companies McKesson and Cardinal Health. With rumors of Amazon lurking, it was apparently their turn, as McKesson and Cardinal share prices have recently hit the skids.

First grocery, an $800 billion business, then drugs, about a $500 billion business, and now medical products?

Actually, Amazon is already in the medical supply business. It launched its venture just a few years ago through its Business Platform and claims to already support nearly 50,000 sellers generating more than $1 billion in sales. But the medical supplies business is bursting with nuance.

For example, where Amazon may do well distributing commodity supplies, it has already discovered how protected the markets are surrounding what are known as physician preference items (PPI). In short, the relationships between physicians, the companies that manufacture high-end medical devices and the reps who sell and support their use remain an integral part of healthcare’s core fabric. Not to mention the fact that major health systems are able to negotiate richer, more strategic arrangements directly with manufacturers.

In other words, while the medical supplies business may sound great, it doesn’t compare to the relative ease of capture and monetary value of the drug distribution business.

Amazon could easily become the ultimate buyer of generics. It could quickly start its own mail-based drug-delivery business. Amazon’s logistics capability actually suits the nuanced requirements of drug storage and distribution (speed, security, environmental controls). The company is always looking to add value to Amazon Prime membership, and drugs represent a quintessential replenishment product opportunity.

While healthcare is loaded with established relationships and business models that are begging for disintermediation (the industry presents a bounty of shiny new objects to chase), becoming America’s largest and most trusted pharmacy should be more than enough to satisfy Amazon’s appetite for disruption.

Amazon Rx would enjoy the insular benefits of a highly regulated business that lacks the transparency Amazon thrives on creating. The industry’s drug pricing schemes approach indefensibility, bringing to mind the old adage, “pigs get fat, hogs get slaughtered.”

Yes, while the specter of Amazon will continue to negatively impact the margins of major medical products distributors, I doubt that we’ll see any rush to sell positions in top performers like McKesson and Cardinal. But with respect to Amazon’s musings on the outskirts of pharmacy? That’s another story — one that I’m convinced is now being written right before our eyes.

The specter of Amazon continues to provide supply chain practitioners with increasingly rich context, if not specific lessons to consider. Not that all category managers should be eyeing their markets through the Amazon lense, but we shouldn’t be staring down such a powerful gift horse either.

Fat incumbents don’t concern themselves with other fat incumbents. They’re afraid of the disruptors. Now to be clear here (spoken with experience working for several “disruptive” startups), not all disruptors are created equal.

In other words, if the disruptor happens to be Amazon, then exploring what it has to offer, if not using it (e.g., Amazon Business) to deliberately shake the bag and incite competition just makes sense.

In healthcare, as its practitioners take back control of their supply chains and, for example, learn to source, you’re seeing manufacturers, distributors, group purchasing organizations (GPOs) and, yes, Amazon’s emerging platform now having to compete for business that several of them formerly treated as a birthright. While Amazon is working hard to establish its foothold in this realm, its drug distribution opportunity looks more like an attractive long-term lease opportunity on a huge part of the industry’s available real estate. That’s a big difference.

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