Amazon's Potential Pharmaceuticals Play May Come with Challenges

Ryan Black
MAY 19, 2017
In 1999, Amazon bought a 40% stake in Drugstore.com, a startup attempting to sell over-the-counter drugs and pharmaceuticals alike over the web. A Los Angeles Times article on the deal speculated that it would allow “the dominant online bookseller” to “move beyond print, music and videos.”
 
Drugstore.com did not quite work out: in 2000, the company laid off 10% of its work force and announced losses north of $33 million. In 2010, its pharmaceutical operations were sold off for a mere $10.9 million, leaving it a traditional over-the-counter operation that was bought and folded by Walgreens soon after.
 
Times, however, have clearly changed. It would be scarce to hear Amazon called an “online bookseller” these days, a phrase like “retail behemoth” is perhaps more appropriate. Reports bubbled up this week that the consumer goods colossus is exploring a formal, direct entry into the pharmaceutical market. According to a CNBC report, the company has been holding annual meetings to discuss the prospect for a few years, and recently hired Mark Lyons off of Premera Blue Cross to organize an internal employee pharmacy benefits program, which could be expanded to form the basis of the operation. The company has not commented on the report.
 
Despite the brand’s broad reach and vast resources, the unique nature of the pharmaceutical industry brings its own challenges to online retail.
 
The pharmaceutical market and its corresponding payment model are both unique. Access to a pharmacy benefits manager (PBM) is essential to pharmaceutical distribution, as two-thirds or more of all domestic prescriptions are processed by them. The complex system of makers, distributors, and PBMs may not be as simple to penetrate, and there exist a web of longstanding contracts between all involved. There is some speculation that Lyons may’ve been brought on to explore the company’s options there, and the notion of buying a PBM or a prescription processing software company is likely not off the table: Amazon’s long-game of spending piles of money and waiting years for a profit is well-documented.
 
Amazon’s same-day Prime Now service got into the business of pharmaceutical sales in Japan earlier this year, as the company often pilots its services in other markets before bringing them home. In Japan, however, consumers can input symptoms and receive pharmacist approval for certain drugs within the Amazon portal, a system unlikely to be legally replicated in the United States.
 
Logistics issues may also loom, with the need for confidence, expediency, and accuracy in a process of transmitting a prescription from a doctor to Amazon. Plus, still as true as it was 18 years ago, “for the parent of a child who needs antibiotics immediately…there's no alternative to the corner pharmacy,” as noted that 1999 Los Angeles Times article. Though integration has sharpened to allow same-day deliveries in many parts of the country, if the point of buying drugs on Amazon was lower prices, the fees associated with instant delivery could negate the savings or give Amazon another cost to eat.
 
There’s also the inherent risk involved in shipping expensive pharmaceuticals, but that hasn’t been a hitch for companies like CVS, which already offer such services, and while the concept was more novel in 1999, the field of online pharmaceutical sales is already crowded. Still, the clout of Amazon alone was enough to drill into the stock prices of CVS and Walgreens upon CNBC’s report.
 
The upsides, however, are just as numerous. The market is enormous, and speculation places Amazon’s potential opportunity in the tens of billions of dollars. There are certain pharmaceutical products that consumers would likely be relieved to order from Amazon, skipping face-to-face interaction, such as emergency contraceptives and male sex drive drugs.
 
And as always, the drone questions still hover: when will they be allowed to fly, and when they are, will they be allowed to carry a cargo full of pharmaceuticals?
 

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