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Amazon threatens to disrupt the prescription drug delivery business, analysts say

Samantha Liss, St. Louis Post-Dispatch on

Published in Science & Technology News

Because of that role, the PBMs have been criticized by some for playing a role in soaring drug prices. The acrimonious breakup of Express Scripts and health insurer Anthem helped fuel the debate about pricing. Anthem has accused Express Scripts of overcharging by $3 billion a year, a charge vigorously disputed by Express Scripts. Their divorce became official this month, with Anthem saying it would take its pharmacy management business in-house with the help of CVS, beginning in 2020.

Not all analysts are convinced Amazon will enter the industry.

"I think the Amazon getting into the PBM business is a bunch of B.S.," said Vishnu Lekraj, an analyst with Morningstar. "I don't understand how a company that can ship goods to a consumer can take over every single industry."

But speculation over Amazon's intent has moved the stock prices of the companies in the pharmaceutical space. Express Scripts tumbled nearly 3 percent on Oct. 6 a day after the Leerink report was publicized; it slipped another 2 percent on Oct. 9, after brokerage Raymond James downgraded the stock to "underperform," citing the company's vulnerability to "escalating competitive pressures," alluding to the Amazon threat. Express Scripts stock is down more than 14 percent since the beginning of the year.

What attracts Amazon to the PBM industry, some analysts said, is the opportunity for profit and a way to "develop deeper relationships with consumers," said Patrick Finnegan, an analyst with Fitch Ratings.

Amazon's core business is being able to fulfill orders and ship retail goods to consumers all across America. About 75 million Amazon customers pay a set fee each year to be able to receive their orders in two days or less. The program is known as Amazon Prime.

"Mail order is the most likely point of entry and is ripe for disruption," according to the Leerink report.

It's the mail order pharmacies of some other PBMs, including Express Scripts', that have been "besieged by poor customer service and complaints," according to the Leerink report.

However, analysts warn that the PBM industry is not as simple as shipping drugs.

"But at the end of the day, you really do have an awful lot of barriers that need to be addressed. They're not insurmountable, but I don't think it's as easy as selling retail products," Finnegan said.

If Amazon does not decide to build up its PBM internally, an option would be to acquire an existing PBM, potentially Express Scripts, according to Leerink, although the analysts there think a mid-sized acquisition would be more likely.

Or, Amazon could partner with an existing PBM like Express Scripts, which Leerink says could drive more volume and capture market share from retail pharmacies who are more at risk of Amazon's entry into the market, particularly with the availability to use Whole Foods locations as pharmacies, too.

For Express Scripts, a partnership with Amazon could "potentially allow it to recapture lost business, retain its large (Defense Department) contract, and increase volumes," according to the Leerink report.

Express Scripts CEO Tim Wentworth said in a recent earnings call that he's open to talks with Amazon. "We'd be interested in working with them."

(c)2017 St. Louis Post-Dispatch

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