A new Morgan Stanley note explains why.
(Meg’s colleague, Chrissy Farr, broke the story that Amazon was seriously considering the move earlier in the month.)
The October 10 report, “Prime Time for Amazon’s Entry Into The Drug Supply Chain?” by Morgan Stanley equity analyst Ricky Goldwasser and colleagues, points out that the regulatory barriers to entry here are relatively low and that the various markets for dispensing drugs are both fragmented and huge. (MS puts the annual U.S. spend on branded drugs at $255 billion and generics at $115 billion.)
But the most provocative takeaway from the client note is how it could disrupt the oft-criticized middlemen in the prescription drug realm, pharmacy benefit managers, or PBMs—which I wrote about recently here.
The MS team lays out “four hypothetical phases” in which Amazon could insert itself into the now-overly-mediated supply chain and ultimately pass along some savings to consumers:
The first would be to set up “virtual retail pharmacies” alongside its dozens of other sales “departments,” from books and baby products to wine, and then contract directly with generic drug makers to sell their pills. “Phase three, establishing direct relationships with branded manufacturers, would be the most critical to changing the marketplace as we know it today, and could take a long time,” the MS analysts write. However…“if Amazon were successful in changing the brand pricing model to be based on ‘net’ price versus the current gross model, we estimate a portion of rebates and other supply chain discounts currently being retained by plan sponsors, PBMs, and to a lesser degree drug distributors could pass back to consumers.”
So what would consumers lose in the deal? Unfortunately, something enormously valuable, in my opinion: the voice of the independent pharmacist. As I wrote back in January, the old-fashioned neighborhood pharmacist remains one of the most accessible frontline healthcare providers in a lot of old-fashioned American neighborhoods. (Eighty percent of independent pharmacies are in communities of 50,000 residents or fewer.)
Amazon getting into this market would likely be a death blow for them, more than it would be for big chains. That would be a big loss, in my view, for American healthcare.