The greatest show in e-commerce is at it once again.
Amazon.com (NASDAQ:AMZN), according to a source familiar with the matter via a CNBC report, is contemplating whether it wants to get into the pharmacy market and sell prescription drugs. Though the CNBC report suggests that Amazon has considered entering the pharmacy business before, it's apparently getting even more serious than in previous years, considering that it's looking to hire a manager for its "professional healthcare program."
Amazon wants to flip the "script"
The long-term numbers game is very encouraging for Amazon. According to the U.S. Census Bureau, the U.S. elderly population is expected to nearly double to 88 million from 48 million between 2015 and 2050. Since elderly Americans are likely to require maintenance therapies as they live longer, the long-run trajectory of prescription drug demand in the U.S. points higher.
Amazon has also demonstrated on numerous occasions that it can enter markets where it previously had little to no market share and carve out significant sales. It's essentially the gold staple of retail e-commerce and is a rapidly growing cloud services giant.
It also has an exceptionally loyal consumer base that's hooked with its Prime membership, which comes with a number of perks (most notably free two-day shipping for most purchases). The idea here being that with an already established base of loyal customers, Amazon should have no trouble coercing consumers to use Amazon as their pharmacy of choice. Plus, Amazon's transparent pricing practices could also be viewed as a positive in an industry where true list prices of drugs are a well-kept secret in many instances.
Stephen Buck, the co-founder of GoodRx, believes Amazon has a $25 billion to $50 billion market opportunity if it decides to move forward with a push into the pharmacy space.
A tough pill to swallow
While Amazon has been undeniably successful in most of its ventures, I'm going to respectfully disagree with the majority of pundits and suggest that the e-commerce giant will struggle mightily if it decides to jam its foot in Big Pharma's door.
There are three big problems that Amazon's going to uncover if it decides to enter the prescription-drug business.
To begin with, the prescription-drug industry is highly regulated, meaning Amazon, which has next to no knowledge and expertise within the drug industry, would first have to get its "I's" dotted and "T's" crossed. In other words, there's currently an intricate system of regulations in place that involve the need for prescription authorizations from doctors, insurance reimbursements, and patient deductibles. It means Amazon would need a completely new (and costly) division that would strictly handle its pharmacy operations to comply with regulatory laws in order to get on the same page with insurance companies, with which it has no relationship with at the moment. That's no easy task, and it could take years to get right.
Second, Amazon has previously been involved in the e-commerce drug business only to have it backfire. In 1999, Amazon acquired a 40% stake in Drugstore.com, which sold about 60,000 products at its peak, including pharmaceutical products. In fact, Jeff Bezos served on Drugstore.com's board. But clearly, that wasn't enough to turn Drugstore.com into a profitable entity, with Walgreens Boots Alliance, which had purchased Drugstore.com a few years prior, shutting it down in 2016. This indirect failure demonstrates how difficult it'll be to alter the age-old view that prescription drugs are to be picked up in a brick-and-mortar pharmacy.
Finally -- and I believe this is the big issue that isn't being discussed -- the pharmaceutical industry is dominated by monopolies and near-monopolies. Drug regulations, such as lengthy patent protection periods, allow drugmakers to charge a veritable arm and leg for their medications, and the dynamics of drug pricing aren't going to change anytime soon. There are also often only a small handful of therapies to treat certain ailments, which puts pricing power in the hands of drugmakers, not pharmacy-benefit managers or pharmacy operators. In other words, Amazon probably isn't going to be able to undercut the competition on price as it does in retail and other industries not dominated by monopolies and near-monopolies. And let's face it, a competitive price is why consumers use Amazon in the first place!
One more thing
One last issue: we don't know for sure whether Amazon is considering entering the pharmacy retail space or the pharmacy-benefit management (PBM) space, and there's a pretty sizable difference between the two.
If Amazon were to go the route of becoming a retail pharmacy, it may have some luck in attracting cash-based consumers who are uninsured. A lot of its success will depend on whether the current Republican health bill is passed and pushes millions of currently insured people back out of the healthcare system because of affordability. This is a smaller market opportunity than if it were to go the PBM route, but it would certainly give the company a better chance of success, albeit regulatory issues and previous e-commerce drug website failures are hurdles it would need to overcome.
If Amazon decided to go the PBM route, it would be a much larger revenue opportunity, but it would be competing against Express Scripts and CVS Health, which have significant PBM market share. Building rapport as a third-party between drugmakers, insurers, and everyone else isn't something that happens overnight. Amazon would likely struggle to carve out even 5% share in the PBM industry, in my opinion.
This Fool believes Amazon should stick with retail, content delivery, and the cloud, and leave the prescription drug business to the established players.
Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool owns shares of Express Scripts. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.