Amazon has started its pharmacy war by carpet bombing the sector. Stefano Pessina, chief executive of Walgreens Boots Alliance, says he is not “particularly worried” about the $835 billion Internet mega-store buying online pharmacist PillPack. But investors aren’t so sanguine: they lopped some $30 billion off the value of drugstore chains, distributors and insurers after the deal was unveiled. Consumers, for their part, will happily fuel the fight over the sector’s fat margins.
The company hasn’t said how much it is paying for PillPack, but in April CNBC reported that Walmart was looking to buy it for less than $1 billion. Even if Amazon paid twice as much as Walmart was considering, it’s understandable why such a small deal did so much damage.
The deal means Jeff Bezos’s firm will own a business that specialises in shipping drugs — and that has licenses allowing it to prescribe drugs in all 50 states. Amazon’s operating margins for its North American retail business are 3 per cent, compared with 5 per cent at CVS Health and Walgreens. So there’s room for cost cutting given Amazon’s reputation for starting price wars.
Moreover, Amazon’s partnership with JPMorgan Chase and Berkshire Hathaway to reduce healthcare costs is a big hint that this deal is part of a larger fight against insurers, pharmacy benefit managers and other healthcare middlemen.
Sure, pharmacy chains have some advantages. Patients who need medicine immediately care more about being near a local shop than getting a slightly lower price online. Additionally, the convoluted nature of rebates, the opacity of drug prices and the complexity of the drug-distribution chain may make it hard for Amazon to make a buck.
Over the past two decades, though, industries such as fashion, furniture and food have all been described by incumbents as relatively impervious to online competition. Bezos has steadily proved them wrong. Today’s sector bombing may merely be the opening day of a long and damaging war on healthcare margins.
n Amazon said on June 28 it had agreed to acquire PillPack. The price was not disclosed. PillPack is an online pharmacy that is licensed in 50 states and ships drugs to all states except Hawaii. In April, CNBC reported that Walmart was looking to buy PillPack for less than $1 billion.
n Stocks in pharmacy chains CVS Health and Walgreens Boots Alliance were down 8 per cent and 10 per cent respectively in early trading after news of the deal broke. Shares in drug wholesalers McKesson, Cardinal Health and AmerisourceBergen also fell sharply.
n During Walgreens’ earnings call on June 28, CEO Stefano Pessina said: “We are not particularly worried. Of course, we are not complacent,” in reference to Amazon’s acquisition. — Reuters
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