The move, while expected at some point, still hit pharmacy giants CVS Health Corp. and Walgreens Boots Alliance Inc. hard: Both stocks slumped in early trading Tuesday. Investors are right to be concerned.
The prescription drug market is complex and mail order currently accounts for a minority of filled prescriptions, but Amazon is a logistical behemoth that has relationships with millions. The e-commerce leader poses a severe threat if it can deliver drugs reliably, quickly, and cheaply. Amazon certainly got the timing right. Telemedicine and mail-order drug startups are getting people used to the idea of online health care, and the pandemic is likely to boost demand and encourage new habits as people socially distance.
Even if it takes time for Amazon to pick up steam, it would be foolish for the big pharmacy chains to regard its invasion of their turf as anything but perilous. The move heaps pressure on physical pharmacies to figure out a business model that relies less on physical prescription refills.
If you want to see the threat Amazon poses, just look at how drugstores like CVS and Walgreens have performed recently. Pharmacy sales have held up relatively well throughout the pandemic, helped in part by people picking up bigger prescriptions to cut down on refills. Other “front of store” retail sales of things like groceries and toothpaste — products that are increasingly easy to buy online — have been sluggish for years and fell during the most acute phases of the coronavirus crisis along with foot traffic after a brief boost as people stocked up on necessities such as toilet paper. Amazon’s entry could accelerate the retail decline while also eating into crucial prescription revenue by siphoning scripts or pressuring pricing.
CVS and Walgreens are certainly aware of this problem. CVS has responded aggressively. Its pharmacy-benefit arm oversees drug plans for millions of Americans, helping it offer incentives for customers to keep filling prescriptions via its stores or mail-order service. The $69 billion acquisition of insurer Aetna Inc. in 2018 gave it another captive audience, one that it hopes to serve better by adding more clinics and health-care services to its stores. That should make its retail footprint more relevant in the long run, but it needs to accelerate its efforts with Amazon looming larger.
Walgreens lacks a pharmacy-benefit or insurance arm and is more exposed. Its value may wilt unless it can develop and implement more compelling reasons to go to its stores. The company is building out clinics of its own and has a series of partnerships designed to expand its services, but they feel like half measures.
Incumbents have some time. Amazon will have to navigate America’s wildly complex drug distribution and reimbursement system to compete. Plus, mail order lags for a reason: Most people live close to a physical pharmacy and mail service isn’t always reliable. It’s also not always easy to move prescriptions.
If any company has the motivation and resources to solve these problems, it’s Amazon. So pharmacies shouldn’t mistake any early struggles as a sign the threat less formidable. Any Amazon growing pains are likely a short reprieve.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.