Amazon Hastens Retail Pharma's Last Stand

Summary

• Amazon continues to startle markets with its market performance to date, leaping almost 52% through Friday's market close.
• Amazon's partnership with JP Morgan Chase and Berkshire Hathaway has markets speculating on the path the company will take in applying its resources to the US healthcare leviathan;
• Amazon's most recent foray into the retail pharmaceutical space with the purchase of closely held PillPack now gives the giant the necessary regulatory licensing to compete in 49-states;
• Retail pharma's biggest players continue the consolidation process with vertical and horizontal integration schemes to slow the pace of the Amazon competitive threat;
• Investors remain wary as Amazon's pace gathers momentum.

Amazon’s (NASDAQ:AMZN) interest in the $450 billion US pharmaceutical market is long-standing. The company already sells over-the-counter medicines like aspirin and antihistamines, to go along with its copious offerings of supplements and vitamins on its worldwide platform. It already has licensing to sell pharmaceuticals in 12 states (Nevada, Arizona, North Dakota, Louisiana, Alabama, New Jersey, Michigan, Connecticut, Idaho, New Hampshire, Oregon, Tennessee, with an application pending in Maine). And now with the purchase of the closely held, online, Manchester New Hampshire-based PillPack that will clear in the latter part of the year, Amazon with the stroke of a pen has the necessary licensing to sell pharmaceuticals in 49-states. Investors were certainly quick to notice and the reaction hit markets with tsunami force. With the 28^th of June announcement, brick and mortar stalwarts of the pharmaceutical retail world like Walgreens Boots Alliance (WBA), CVS Health (CVS) and Rite Aid (RAD) collectively shed about $11 billion in market value.

Amazon’s renown logistical efficiencies and willingness to sacrifice short-term margins for long-term market share were at the fore of the market move. Most prescriptions in the US are still filled in person and the delivery of scripts remains highly fragmented. If Amazon did nothing else but centralize the distribution of pharmaceuticals, this alone could likely apply enough downward price pressure on the cost of drugs to deliver real savings to US consumers. Centralizing and organizing existing data is the most likely front of significant cost savings and returns for both the end user and company alike. It could provide augmented negotiating clout to force better pricing deals on drug manufacturers. Even if mere convenience becomes the watchword of the makeover, laying the groundwork for cost reductions in the delivery of pharmaceuticals to those in medical need is a worthy endeavor for a country that spends almost 18% of its total annual output on healthcare. While the ordering, dispensing and delivery of pharmaceuticals to consumers is heavily regulated by myriad agencies at almost every level of government, the logistics of the operation plays to Amazon’s well-honed strengths. And after all the applications are committed to computer code and the process, literally, hits the road after the necessary regulatory blessing is in place, the delivery of scripts should not be much different than the delivery of books—and the thousands upon thousands of goods and services Amazon already plies to consumers online across the country and around the world. Getting there, however, will mean overcoming an entrenched modus operandi in the delivery of pharmaceuticals that hasn’t changed much in the last century.

Figure 1: Amazon against the S&P 500 Benchmark

Amazon (green area, upper frame) is already up a staggering 52% through Friday’s market close (13 July), driven in part by online consumer spending that is up 9.1% through the end of May YOY. The stock is trading well above its 20-day exponential trading average since April (blue line, upper frame). The feat is all the more startling given that consumer spending fell 0.9% through the end of the 1^st quarter, its lowest post since the 2^nd quarter of 2013. Amazon claimed about 44% of all online sales through the end of 2017, according to One Click Retail data. The pace of Amazon’s market performance is equally startling given the muted performance of the S&P benchmark (green area, top frame) whose YTD performance struggles with returns just short of 4% over the same period (see Figure 1, above).

The benchmark will continue to struggle as mounting uncertainty over US trade policy dampens both new orders and capital investment plans across the economy. New orders dropped 0.6% overall in May over April with transportation new orders falling 0.3% while non-defense new orders falling 0.6% for the period. Capital investment overall fell 4.8% with nondefense capital spending falling 6.5% for the period. Commercial and industrial loan books expanded at a pauper rate of 0.3% in May after a 2.1% surge in April, which just happened to be the biggest monthly demand surge for C&I books since February 2014. May’s anemic rise was the worst post since back-to-back negative growth months in October and November of last year. While the country’s job creation capabilities remained robust with 213,000 jobs being created and enticing 601,000 back into the labor force during the month of June, capital investment is now being held hostage by US trade policy—a grip that becomes all the tighter as the dollar value of tariffed goods climbs. And despite ballooning deficits due to TCJA and added government spending, the dollar’s 2^nd quarter performance racked up 5.5% gains against the euro and double-digit percentage gains against the rand and the real and about 4% against the renminbi. At present, better US growth prospects appear to blind more traditional fears conjured by ballooning deficits as global investors continue to pile into US assets.

Amazon’s YTD drive was lifted decisively by the very public joining of forces with the funding muscle of Warren Buffet’s Berkshire Hathaway (BRKB) and JPMorgan Chase (JPM) in January. The yet-to-be-named company is charged with the mandate of targeting the excessive costs of delivering healthcare in the country. While the first phase of the enterprise is setting up the template to reduce the cost of healthcare delivery to the collective sum of the group’s employees, component parts of the company will almost certainly contain a new, centralized take on the pharmacy benefit manager (NYSEMKT:PBM) format—complete with a top-to-bottom technological makeover of how scripts are ordered, packaged, dispensed and delivered to end users. The same such makeover is in store for each facet of the healthcare delivery system as app-based online medical screening becomes more widely available and barriers to entry by technology startups enshrined in state and local law break down myriad professional practices that serve more of a purpose of protecting traditional practitioners than protecting consumers. In states were routine online eye exams are legal, for example, the process of ordering glasses or even contact lenses could be had from a smartphone—dramatically reducing the out-of-pocket costs to consumers. Harvard professor of medicine, surgeon and writer Atul Gawande was recently named to head the project’s first phase.

Figure 2: Walgreens Boots Alliance and Rite Aid against the S&P 500 Benchmark

A rather different paradigm of forward growth emerges from the bricks-and-mortar retail pharmaceutical space where market scale continues to dominate strategic thinking. In October 2015, Walgreens proposed a deal worth $9.4 billion for the purchase of Rite Aid’s 4,600 stores, which was eventually rejected by the Federal Trade Commission on anti-trust grounds. The deal was finally terminated in June 2017 with Walgreen paying out a $325 million termination fee.

Undeterred, Walgreens agreed to less robust purchase of Rite Aid assets two months later which included 1,932 Rite Aid stores and three distribution centers in Connecticut, Pennsylvania and South Carolina for a sum of $4.4 billion, about 42% of Rite Aid’s total marketable assets. The FTC agreed. As of the 27^th of March, the store transfer was completed. The transfer of three Rite Aid distribution centers and related inventory will begin by the 1^st of September.

Walgreens Alliance Boots is a holding company that includes Walgreens and Boots Alliance, which dates from an initial purchase of 45% of the Swiss-based company in 2012, followed by the complete purchase in December of 2014. Walgreen Alliance Boots, now based in Deerfield, Illinois, is in 25 countries. In March and August 2016, Walgreens Alliance Boots exercised warrants on almost 56 million common shares of AmerisourceBergen (ABC), taking about 25% of the company with the two separate purchases. ABC is one of the largest distributors of brand-name and generic pharmaceuticals, healthcare products and supplies in the country.

The combined company operates 8,100 retail stores separated in two segments, those in the US and its territories and those in the international space. The continental US has 7,979 of the total of the domestic segment which includes the US, Puerto Rico and the Virgin Islands. The international segment comprises 4,722 stores with 2,486 or 53% being in the UK and 1,193 or 25% being in Mexico. Other international store locations include Chile, Thailand, Norway, the Republic of Ireland, the Netherlands and Lithuania, all with less than 1% of the total. The total store count comes to 12,822 with 63% being in the US and its territories and 37% being located abroad.

Following the same pattern, 74% of the company’s fiscal 2017 sales, or $87.302 billion of the company’s total sales of $118.2 billion came from the US with 11% or $12.60 billion in sales coming from the UK. About 14% of total sales came from Europe excluding the UK with about 0.02% being scattered widely across the rest of the company’s geographic reach. Long-lived assets followed a similar trendline with the US playing host to 76% or $10.34 billion of the total $13.6 billion. About 18% or $2.5 billion of long-term assets are located in the UK while the remaining company assets are dispersed widely about the world.

Company earnings have been mixed since the incorporation of Alliance Boots in December 2014. Net earnings were up 110% YOY to $4.2 billion by the end of fiscal year 2015 in August. Diluted earnings per share trended similarly. Dividends increased by 7% to $1.373/share while long-term debt soared from $3.72 billion to $13.2 billion. By the end of fiscal year 2016, net earnings had fallen just over 2% to $4.2 billion while EPS fell 4.50% to $3.82/share. Dividends increased 6% while long-term debt increased 40% to $18.71 billion with the ABC stock purchase in March and August of that year.

With another year passing, Walgreens launched a second, this time scaled down attempt at buying Rite Aid assets. By the end of the fiscal year 2017, net earnings had dropped 2.15% to $4.1 billion. Diluted EPS also trended downward by 1% to $3.78/share while declared dividends increased to $1.525/share, up 5% YOY. Reported debt for the period dropped to $12.7 billion. Internationally, total sales fell to $11.8 billion, down almost 11% for the period as a weak dollar fared poorly against the stronger pound and euro. Operating income fell 28% despite an increase of 50 stores to the period mix.

In the company’s third fiscal quarter through the end of May, consolidated sales hit $34.3 billion, up 14% YOY. Operating income rose 5.5% for the period to $1.6 billion while diluted EPS rose 26.2%, the latter being aided by a lower number of outstanding shares YOY. It was a good quarter. TCJA helped the company’s bottom line by reducing the effective tax rate to 7.6% for the period, down from 12.4% YOY. By segment, gross US sales at $25.92 billion for the period was up 15% for the period from 9,964 stores, an increase of over 22% YOY. Pharmacy sales were up 19% for the period due mainly from the acquisition of Rite Aid stores. Retail sales were up 5.3% YOY, also due to the inclusion of Rite Aid sales in the quarterly report.

Investors remain wary. Walgreens (green line, upper frame) is down just over 13% through Friday’s market close (13 July). The stock has traded well below its 20-day exponential trading average (blue line, upper frame) since May, underperforming the S&P 500 (green area, upper frame) over the same period. Market momentum fell negative in the latter days of June (lower frame). The company’s long-term credit rating stands at BBB, the last call for investment grade. Meanwhile, RAD (black dotted line, upper frame) has seriously underperformed the S&P benchmark since March save for one last leap of faith in the latter part of June before diving into market oblivion with few signs life (see Figure 2, above).

Figure 3: CVS Health and Aetna against the S&P 500 Benchmark

CVS Health, the country’s largest PBM, is trying to stay competitive by building vertical market scale with the proposed purchase of Aetna (AET), the third largest health insurer, in one of the year’s biggest M&A deals. The cash and stock deal prices out at a whopping $69 billion ($77 with debt) as two, noncompeting companies occupying different sectors of the healthcare equation attempt to join forces. An obvious efficiency includes cost reductions in clinical care through an increased customer base for CVS walk-in facilities to deal with nonemergency patient treatment. The increase use of walk-in medical treatment has been shown to reduce high cost visits to emergency room facilities that have become a default mechanism for non-critical care, especially as the availability of regular doctors on short notice becomes all the more problematic. CVS is also rolling out same day delivery of its scripts in several major urban markets while increasing the delivery of medical services in many of its 8,100 retail stores and almost 1,700 leased pharmacy outlets in Target facilities across the country. The deal still awaits a verdict from the Department of Justice.

Beyond this initial sketch, the cost efficiencies of this vertical merger become much more nuanced. With the May announcement of the merger between Cigna (NYSE:CI) and Express Scripts (NASDAQ:ESRX) and Optum Rx United Healthcare, the three payer PBMs could dominate their captured client bases without setting up a clear path to achieve cost efficiencies that would trickle down to the end user—the consumer. Weak market competition, historically, has been a recipe for increasing, rather than decreasing, costs to the consumer. The merger lends few credible projections to counter such a view.

Investors to date have largely agreed. CVS announced the purchase in the first week of December last year, valuing Aetna’s assets at roughly $207/share, a premium of just over 16% to its then $178/share market price. It took until the end of January before Aetna peaked at an all-time high of $193.74 before falling back to $168.11 by the last week in March—less than a week after shareholders approved the deal. Since the vote, however, the stock has gained just over 14% to $191.89 through Friday’s market close (13 July). The trend will likely continue until the market catches up with the market premium CVS is paying to acquire Aetna’s assets. Seven months after the December announcement, investors remain wary.

Revenues increased to $184.77 billion through the end of 2017, up just over 4% YOY. Operating profit fell to $9.52 billion, down just over 8% YOY as operating expenses rose almost 3% YOY. Net income, however, increased to $6.6 billion for an 25% increase for the period. Earnings per share rose just over 31% to $6.45/share while cash dividends increased to $2.00/share, up just short of 18% for the period. Debt ended the year at $22.2 billion with $4.8 billion of debt being retired ($3.5 billion in long-term debt) during the year. The annual totals were based on 9,846 stores, up almost 1% YOY.

More recently, revenues through the end of the 1^st quarter ending in March came to $45.7 billion, up almost 3% YOY as both pharmacy services (up 3%) and front-end retail (up 6%) were positive for the period. The effective income tax rate at 32% dropped from 37.3% in March 2017 due to the impact of TCJA. Income from continuing operations rose just under 6% to $998 million.

Market performance year-to-date puts CVS (green line, upper frame) close to correction territory at just over 7%, trading well below its 20-day exponential trading average (blue line, upper frame) since the beginning of April. It was only in the first week in May when Aetna (black dotted line, upper frame) began to break away to its $207/share offer price as party to the deal, well after the deal had been approved by shareholders. CVS itself has experienced a measured comeback, up almost 6% since the beginning of July. Market momentum has also improved as the market catches up with the $207/share offer price that underlies the deal (see Figure 3, above). Investor sentiment remains far from a ringing endorsement.

Figure 4: Rite Aid against the S&P 500

On the 28^th of February, Rite Aid entered into a cash and stock merger with closely held grocery chain Albertsons, which will take over the remaining assets of the company which includes 2,569 pharmacy outlets in 19 states not included in the Walgreen purchase. The yet-to-be announced merged company, which is expected to be floated on the New York Stock Exchange in the latter part of the year or early 2019, will combine roughly 4,900 locations and 4,350 pharmacy counters along with 320 walk-in clinics across 38 states and the District of Columbia. The deal will close in the second half of the year.

In a letter to shareholders in February, Rite Aid's CEO John Standley pressed hard for a yes vote on the company’s $24 billion merger which will create the fifth largest food and drug retailer in the country. The company would fall behind the ranks of WalMart (NYSE:WMT), CVS, Kroger (NYSE:KR) and Walgreens, with estimated revenues topping out at $83 billion from their current $22 billion through the end of 2017. The merger would create 4,310 pharmacy and grocery centers in 38 states and the District of Columbia. Still, the combined grocery and pharmacy centers would be less than half the size of both CVS at 9,760 stores and Walgreens at 9,430. The merger would also include Envision RX Options, Rite Aid’s PBM. The shareholder vote on the merger runs through 9 August.

Interestingly, the letter came out three days prior to Amazon's announced purchase of PillPack which is expected to imbue the vote with a good deal of reflection.

Rite Aid (green line, upper frame) has struggled financially for a number of years. The company’s stock has traded well below its 20-day exponential trading average (blue line, upper frame) since April. Market momentum (lower frame) turned negative in early June (see Figure 4, above). Revenue growth over the company’s fiscal year ending 3 March declined 5.6% YOY to $15.8 billion over 2,604 stores. They declined 0.3% through 2017 fiscal year ending 4 March YOY, posting $16.77 billion with 2,632 stores in the report. They grew in fiscal year 2016 ending 27 February by 1.6% YOY to $16.8 billion with 2,645 stores in the mix. Total revenues grew by 3.9% through fiscal 2015 ending 28 February to $26.53 billion over 4,587 stores. Pharmacy sales as a percentage of total retail sales averages 68.3% since 2015, with an annual growth rate over the period of minus 0.78% as full-priced branded drugs lose their market exclusivity to less expensive generic knock-offs. Pharmacy sales continue to be pressured by the increase of generic drug sales Front-end sales averaged 32% for the period with a growth rate of 0.2% to the positive. Annualized same-store prescription count growth grew at a 1.35% rate for the period. The company’s stock performance to date is still searching for rock bottom through Friday’s market close (13 July). Little wonder the company was put up for sale. That CEO John Standley, who took home $7.6 million in total compensation last year while skillfully steering the company into its current market abyss, has been tapped to run the combined company, defies discernible logic.

Forward growth, then, poses two very different strategies for Amazon and its immediate competitors in the retail pharmaceutical space—one based largely on market nimbleness and technology and the other based on further vertical or horizontal integration of existing industry players using captured audiences in hopes of augmenting traditional paradigms of shareholder value. Amazon’s purchase of PillPack goes to the heart of one of the last vestiges of exclusive retail revenue streams where Amazon is not a major player—prescription drug sales. PillPack’s pending entry into the Amazon family of retail operations is the strongest signal yet that the company clearly has the healthcare sector in its sites—and with the purchase Amazon automatically leapfrogs the onerous regulatory task of being invited to the dance.

PillPack will also provide another important feature to the Amazon portfolio of companies—recurring sales. Pharmaceuticals are prescribed for specific durations of time with the potential for refills at each designated endpoint. The selection, packaging, refill, ordering and delivery services would fit rather nicely onto Amazon’s AWS platform, creating efficiencies that have a real potential to lower the cost of drugs by eliminating many of the myriad intermediaries in current supply chains. At some juncture in the process, end users would be able to order prescriptions with a few keystrokes on a smartphone, a computer—or even by voice commands—from the comfort of one’s living room, office desk or hospital bed. Such a technology-based platform would be warmly welcomed by an estimated 75 million millennials, the first US demographic grouping of size to span the computer, smartphone, smartwatch, smart headphone and, lest we forget Alexa, Siri and Hey Google—era.

By expanding on PillPack’s individual, date-stamped packaging concept, daily dosages are much more apt to be taken en total than depending on patient wherewithal to dispense the proper dosages from myriad pill bottles strewn about a bathroom sink. One in five patients in the US take more than three medications a day and roughly 50% of patients with chronic disorders fail to take the prescribed dosages of drugs they are prescribed, according to World Health Organization data. This simple failure not only compromise treatments but have led to tens of thousands of preventable deaths in the US annually.

These are some of the many avenues that Amazon has to ponder as it contemplates the dimensions of its online assault of the retail pharmaceutical space. Amazon has the technological, financial and innovative heft to bring clear efficiencies of scale to the $450 billion US pharmaceutical market—heft that PillPack clearly lacked as a standalone company. Amazon now has a workable format to affect change to an industry where change has all but ossified.

Analyst’s Disclosure: I am/we are long AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[johnstandley]

Rite Aid The company’s stock performance to date is still searching for rock bottom through Friday’s market close (13 July). Little wonder the company was put up for sale. That CEO John Standley, who took home $7.6 million in total compensation last year while skillfully steering the company into its current market abyss, has been tapped to run the combined company, defies discernible logic.

[kuttingedge]

It's still searching for rock bottom because there is NO TRUE VALUE to the market worth of Albertson's.

It's like selling your car to a naked man for whatever change is in his pockets.

It's a bad deal.

[Logistics Trends & Insights]

Very nice analysis by Douglas and I will add a couple of points:

• Amazon wants to own the entire consumer-based healthcare products space in the US.
• UPS and FedEx covet this segment as the revenue yields are high and they will be hurt as Amazon mines the opportunity.
• Growing their presence in this space will allow Amazon to further scale the difficult-to-scale, Home Delivery and reduce overall transportation unit cost.
• Amazons leverage will really kick in once they open their Air Hub in Kentucky, buy more aircraft and build-out an over-night, on-line pharmacy that will sell and manage shipment of traditional consumer pharmaceuticals, specialty and compounded pharmaceuticals.

Finally, redefining the PBM model will be difficult but Amazon is up to the task.

[kuttingedge]

And this will take years.... They will be down the line on aircraft orders, pilots are not just standing on street corners plus it takes huge dollars to train them, landing rights are tough to get, you're talking tens of billions of dollars and many years to replicate a FedEx, UPS, or USPS. For lower margins on drug cost? Doesn't seem like a smart idea.

Putting a Rite Aid in peoples' neighborhoods with immediate access and a $5 billion dollar investment seems a lot more cost effective and possibly immediately accretive. JMHO.

[The Quant Investor]

I doubt PBMs will allow chronic meds to be filled outside of their own mail order pharmacies. I think the well-established players are going to flex their muscles on this one.

[Douglas Adams]

No doubt true. This will be a political decision as to whether such a hurdles of entry start falling protecting current players in the equation. The 2016 presidential election was waged on both sides with calls for the cutting of drug prices to end users. The call was well received on both sides of the aisle. What we have seen since is a good deal of consolidation with offers of more of the same, only with fewer players.

Amazon's foray into retail pharmaceuticals will be a long play with many regulatory hurdles to overcome all along the way. Yet no other player in the mix is offering anything new that markets haven't seen time and again with few signs of any relief on down stream pricing. Amazon's quest is in the very beginning innings. Its partnership with JP Morgan and Berkshire will provide the format that will be the basis of its national launch. The revamping of drug ordering, packaging, dispensing and delivery will form an integral component of this new mix as PillPack designs go national scaling the concept deserves.

[Steve Krol]

Douglas Adams

Thorough article, but disagree with some of your assertions, i.e. Amazon will have to do a whole lot more than acquiring PillPack for anyone to notice sufficiently, since the knee jerk reaction when the PillPack acquisition was announced.

One of your stated facts is also incorrect. The FTC did not block Walgreens full acquisition of Rite Aid in June of 2017; rather Walgreens and Rite Aid pulled the deal in favor of the Asset Purchase Agreement that the FTC quickly approved for a little less than half of Rite Aid's stores. Indeed, in the first of its kind according to the press, the following day The FTC issued a press release making it crystal clear that within days, the full merger might have been automatically approved short of filing suit to stop it, upon the expiration of the time for The FTC to review it. Clearly, there were irregularities in the parties various attempts to gain approval and with the pulling of the merger, after the parties caused shareholders to wait 1 1/2 years for The FTC decision, something was clearly wrong here.

Fortunately, Walgreens defendant motion to dismiss in the original lawsuit filed, for statements Walgreens made along the way in particular how things were going at The FTC was DENIED last week, so it is likely we will eventually find out in discovery what really happened here, and the extent, if any, that Walgreens damaged Rite Aid shareholders, as Plaintiff in this class action. I expect that Mr. Pessina CEO of Walgreens will be the star witness in that case and perhaps another related to the Albertsons offer to merge with Rite Aid. It is a shame that Mr. Standley, Chairman/CEO of Rite Aid attracts lawyers like a magnet, rather than run a large drugstore chain for success.

As to the current Albertsons offer to acquire the remaining Rite Aid stores, whose shareholder vote is not until August 9, 2018, my crystal ball is telling me that existing complications, and lack of full disclosure will make this anything but a done deal, even if the vote happens as currently scheduled.

[kuttingedge]

Interesting piece, though Amazon has a long way to go before becoming the force you imply.

PillPack is still just PillPack, with a new owner. No one feared them before and few fear them now. To be a force, Amazon needs to open pharmacies in each WholeFoods, and their ain't enough of them to exert much more than a glancing blow.

Your comment on Rite Aid's CEO, John Standley, however, is spot on re: a not-as-yet shareholder-approved proposal to merge with financially struggling Albertsons:

" That CEO John Standley, who took home $7.6 million in total compensation last year while skillfully steering the company into its current market abyss, has been tapped to run the combined company, defies discernible logic." RAD shareholders, including Institutional investors, would think it even understated.

Another point, your: "Walgreens agreed to less robust purchase of Rite Aid assets two months later which included 1,932 Rite Aid stores and three distribution centers in Connecticut, Pennsylvania and South Carolina for a sum of $4.4 billion, about 42% of Rite Aid’s total marketable assets." From that, one could deduce the remaining 52%, less outstanding debt, somewhere just north of $3 a share book value, not even close to total enterprise value estimated between $5-6 per share. Another reason for RAD shareholders to vote down the merger.

I pick on this because the way Amazon COULD shake the pharmacy tree is to buy Rite Aid itself, dispose of the incompetent management, and tie in with Whole Foods. Just putting the name Amazon above the store will send sales and volumes skyward. Especially when Amazon technology is tied in with home reorder convenience.

BTW, if anyone has to take different medicines at different times of the day, especially if the amounts vary, PillPack offers no particular benefit. You still have to check each and every one.

[longnose]

in fact RAD can be used as Amazon's drop ship, return processing, drone pickup AND PBM AND pharma and anything else they can dream of - oh ya quick shop - whatever

[Steve Krol]

Kuttingedge

The fact that the author , Douglas Adams , can not understand how Mr. Standley could become the CEO of the combined company is only a function of his lack of knowledge on the numerous conflicts on the board, Albertsons senior management, the negotiation committee, etc., etc. Not to worry Mr. Adams, I have a feeling you will soon find out and you will not be scratching your head much longer, trying to find the answer-Why oh why!

[Germiz]

SC the author was implying that it is unbelievable thing after all the damage he caused to RAD not that he doesn't know about the management and BOD SHAMELESS actions. Nobody with their right mind will hire this man with his record.

[ozzy]

Maybe I am wrong, but, I don’t see Whole Foods doing much since they joined amzn. I think pharmacies may be similar

[Douglas Adams]

This is not a process where results are readily evident in overnight tweaks. I haven't looked at the Whole Foods scenario as yet. The grocery business is notorious for thin margins and price volatility in the best of times, the latter being why core is a much more important number than headline in determining overall price inflation in the greater economy.

[Southern Slant]

A long, but enlightening article. It falls right in line with my comment on the previous article, dated 7-13-18, "Pfizer Is Not An All-Powerful Price-Hiker". There are too many middlemen and distribution entities between manufacturers and ultimate consumers.

[Douglas Adams]

Your point goes to the heart of the issue at hand.

If Amazon is able to begin the process of whittling away at the intermediaries that stand between drug manufacturer and end user via consolidatiion, they will go a long way toward dramatically lowering the cost of drug delivery in the US. I think this is precisely the area where Amazon excels and precisely where costs savings could be wrung from the current drug delivery paradigm--and still maintain sufficient payback schedules to promote research in the next generation of treatments.

[Germiz]

/don't you think Amazon need heft in this area to be able to do that? they should have acquired mismanaged RAD TO ACCOMPLISH THAT

[Investing with impact]

WBA is an average traditional pharmacy retail store with nothing special about it. Most of the items they sell are over priced. It is not run efficiently and at best it has an average stewardship and management. If Amazon is serious to enter in that space, it will affect WBA negatively. In terms of stock price appreciation, there is not even a comparison. AMZN has left WBA in the dusts.I think WBA will lag S&P.

[Douglas Adams]

I would readily agree. Amazon already is applying price pressure on WAB front end sales. Ditto with CVS. RAD is still looking for a market bottom.

When Amazon gives market and logistical scale to PillPack's innovative packaging designs and weds them with Amazon's delivery process, I don't see how the billions upon billions that CVS and WBA are spending on their respective integration strategies will create long-term market value on price to the end user. One could argue that the current financial headwinds each of these companies are facing stem in large part to brand drugs being upended by generics once their market exclusivity comes to an end. Drug pipelines are rather sparse of late and the erosion of brand drug prices are frequently cited as headwinds to current revenue streams. Amazon is in the position to hasten that process to its logical conclusion.

[Formerly_User_48537916]

Serious questions for the author

1. Do we know if Amazon is in talks with the major insurance carriers, for adding Pillpack/Amazon to the insurance companys’ approved prescription vendor list? For example I have Cigna, and they are currently contracted with CVS only, for my particular policy.

2. Are there federal mandates in place for shipping controlled substances (class II-IV) via mail. Are class II drugs like opiates allowed to be shipped via mail relative to federal regulatory standards and agencies? I don’t have such prescriptions, but I’m curious in the context of surgical procedures, emergencies, etc...

3. Is pillpack/Amazon intended to be USA domestic only shipping or will its jurisdiction cover international shipping.?

4. Are there any pharmacist services that are bundled with Amazon/pillpack services? Who does one call to insure drug contraindications are not being violated. Many drugs are dangerous when taken with other drugs. I assume pillpack has access to the patient’s current drug list from the same database that pharmacists do, and that they have staff for this?

5.Are there any brick and mortar outlets with pillpack for extremely urgent emergency situations such as after an ER visit prescription request ?

6. Is pillpack/Amazon meant to be a secondary prescription service that is only used for drugs that are refilled on a periodic basis? Not for post surgical prescription services, and one time prescriptions? And if so, are they working with the insurance companies in this manner, ie as a secondary prescription service?

[Douglas Adams]

Excellent questions all.

The points are precisely the logistics Amazon and its partners are going to work to solve in the first stage of this project, namely with the employees of Amazon, JP Morgan Chase and Berkshire Hathaway. There is a literal myriad regulatory issues to be resolved before something like what I have briefly sketched out before the reality of day-stamped pill packs start arriving on your stoop.

I have every confidence that Amazon will be able to handily handle such complexity within its AWS platform. The logistical part of the equation, indeed, plays to Amazon's current strengths. The regulatory hurdles, on the other hand, are headwinds with a capital "H", make no mistake. In the long run, these headwinds will be tamed or minimized by the political process as they are decisions regarding existing laws and regulatory procedures as they pertain to the handling and distribution of drugs across state lines. Reducing the cost of drugs is a hot political item and a company with the logistical and financial wherewithal to put into place a workable platform to reduce the heavy burden of treating health issues in this country will likely be richly rewarded. Where we can likely all agree is the present system does not work from just about every measure.

That leaves a lot of room for innovation and trying new methodologies with the end goal of reducing costs over time. That is what the Amazon, JP Morgan Chase and Berkshire Hathaway experiment is all about.

[BA Man]

I’ve had most of these same questions, plus one I don’t think AMZN/PillPack can answer. Many older customers (who spend a lot more at the pharmacy than the millennials that Bezos is courting, and who will themselves become older people someday too) view a trip to the pharmacy as somewhat of a social event, as they have a chance for some human interaction. How are they going to replace that?

[komatinskys]

I would add another. Pillpack presents tremendous child safety concerns - drugs in easy to open plastic bags - this type of dispensing should be limited to those that have trouble opening child resistant containers or agree to the liability

[poortorich]

Grocery is actually the last line of defense for retailers

[mjrein]

Long on Walgreens I prefer going there and making sure they are rite rather then mailorder where errors are hard to fix

[Teutonic Knight]

Can AMZN lower drug prices?

How? Can they sell at wholesale prices eventually? How?

It would be great tidings if they could achieve this in time.

[badlittledog]

The only way Amazon cal lower prices is to get rid of PBM’s, wholesalers and go directly to the manufacturers. This will NEVER happen because of the structural way US healthcare works. What pillpack does is make Amazon another mailorder drugstore, nothing more.

[Teutonic Knight]

Get rid of the PBM's? Never say never. The Alliance of AMZN JPM and Buffet is powerful and Buffet and JPM have friends in high places. Bezos is a hostile target with Trump though because of WaPo

Time will tell but AMZN always surprises.

[Douglas Adams]

That is my bet.

Amazon's move into the retail pharmaceutical space will revolutionize the supply chain that delivers drugs from manufacturers to end users. By eliminating the intermediaries in the supply chain and applying the well-honed logistics of Amazon's delivery processes, economies of scale, captured cost efficiencies and the breaking down of the myriad regulatory protections ensconced in local, state and national laws could bring down the cost of drugs considerably over the course of time.

I would argue that investors have already sniffed the premise out in their continuing support of Amazon shares. At the same time, RAD, CVS and WBA struggle with a platform that hasn't changed measurably in recent history. There is a reason RAD, CVS and WBA lost about $11 billion in market capitalization with the announcement of Amazon's purchase of PillPack. Perhaps it is time to look for different paradigms for growth.

[josephaoppenheim]

WBA is 7.8% of my 18 stock DGI portfolio, and I plan to hold it forever as long as it remains a Dividend Aristocrat. WBA currently yields me about 5% on cost.

AMZN has been a great speculation, but that is what it is, a speculation. I prefer investing. I think CVS just froze their dividend, I guess to afford Aetna. Assuming the deal completes, it will be mostly an insurance company, Caremark and Aetna, maybe a great insurance company, but not what I want.

Sure, Walgreen is being disrupted, but that’s nothing new for Walgreen, with over 100 years of surviving disruptions. I do worry, that’s why I won’t be buying more WBA, but I love those dividends.

[rheimerl]

would never underestimate amzn but they are facing off with two heavyweight companies that wont go away easily

[Edward J. Roche]

The CVS purchase of AMZN was done largely because UNH/Optum was taking many contracts away from them. It was not done primarily as a response to AMZN.

Your discussion confuses Amazon, the company, with its stock price. This is a major mistake in investment thinking. AMZN stock price is being irrationally driven up by speculation.

[Douglas Adams]

Thanks for your comment. Of course, I would disagree with your surmise.

While AMZN most certainly attracts a good deal of speculative attention, the area under consideration here is the company's entry into one of the last retail spaces where it lacks much of a presence to date. What I tried to present here is an industry where old-world thinking of markets, economies of scale and synergies is being upstaged by a player with both financial wherewithal and technological prowess that has the potential to provide scale to a company (PillPack) that could revolutionize how pharmaceuticals are ordered, packaged, dispensed and delivered, the likes of which the industry as currently configured has never seen before. In the process, economies of scale and cost efficiencies take on an entirely new dimension that could go a long way toward shrinking the 18% of total GDP that we as a country spend on healthcare. And along the way, shareholder value is created--as evident by investors large and small that continue to bid Amazon skyward. But the most interesting piece of the equation in my opinion, is the efficiencies Amazon could potentially create in bringing down the cost of drugs and healthcare to the consuming public.

The agreement with Berkshire, JP Morgan Chase will be a test run on just how technology and logistics will be brought to bear on the delivery of healthcare in the US. Consolidating the PBM format will undoubtedly be an important component of the exercise, and Pill Pack will for the basis of the thrust, first with the employees of the three component companies, which will be the launching pad for the national format that will be introduced in the aftermath. AWS will form the technical backbone of the company's healthcare platform.

There is no confusion between Amazon, the company and its stock price. Amazon has been very successful in the markets it has entered, introducing unheard of efficiencies to the way and manner goods and services are delivered to consumers. The company's financial wherewithal to forego short-term margins for long-term market share has historically has been a winning combination that investors have been more than willing to support which is reflected in its outsized stock valuation. With competition of this nature and scope pitted against the vertical and/or horizontal integration strategies being proposed by the likes of CVS, RAD, WBA in the selling of pharmaceuticals, over the course of time my bet, wholeheartedly, is with Amazon coming up with an outsized piece of that retail pharma pie--most likely at the expense of the current retail pharmaceutical players.

This is not mistaken investment thinking. Rather, I would call it vision.

[dkohler555]

To Edward J. Roche --

I think you mean to say the CVS purchase of AET (not AMZN). And I do generally agree with your point about the authors conflating of stock price and stock reaction with longer term business strategy by key existing large scale players in the pharmacy business. Obviously, AMZN has been sniffing around pharmacy for a long time, but despite the authors verbiage on logistics, efficiency and purchasing scale (and its not as if the 3 major PBMs don't have immense purchasing power -- they certainly do), I'm not sure that AMZN has figured out how to enter or what it wants to be in this market. I'm not exactly sure what owning a mail order drug business does for them (except create some buying opportunity in drugstore and PBM stocks) in the larger scheme of things. I wouldn't downplay their efforts or the potential to have some impact on the margins, but if they were really serious they would have purchased ESRX (or Catamaran before UNH got to it). Being a mail order supplier is not going to give them critical traction in healthcare, particularly as the overall health delivery industry consolidates and skinnies down networks to reduce cost.

But to get to your point, I don't believe the CVS purchase (still pending) of AET was done specifically because UNH/OptumRx was taking a lot of contracts from CVS -- they are not. In fact, Caremarks (CVS's PBM that competes with OptumRx) has experienced good retention of its PBM contracts. I believe the AET acquisition by CVS (which of course has yet to close) and the subsequent (and still pending) acquisition of ESRX by CI reflects (1) the fact that UNH has been successful with OptumRx and that clients (i.e., employer payors) don't necessarily value the independence of the PBM and (2) more importantly, that scale -- both size and breadth -- will increasingly be key to success in the healthcare industry. Also, specifically with respect to CVS's acquisition of AET, combining with a managed care organization was the best way for CVS to leverage its 1,000+ MinuteClinics. Emergent care clinics are nice and convenient for minor and/or after-hour issues when you don't want to go to an emergency room. Integrating these clinics into an actual health network (i.e., Aetna) makes a lot of sense in terms of cutting down on expensive emergency room visits and provides potential value (lower expenses) to the client/payor of the health plan. To the extent that managed care/PBM consolidation reflects concerns about AMZN, it would be ironic because greater consolidation will end up being a larger barrier to AMZN's success.

Also, as I'm sure you're aware, just because we'll now have the three major PBMs (ESRX. CVS' Caremark, and OptumRx) each associated with a managed health care organization (and let's not forget Anthem using CVS to build out its own PBM), it obviously doesn't mean that when an employer selects UNH it automatically uses OptumRx as its PBM. For example, my health insurer is UNH but my PBM is CVS Caremark. The employer/client/payor makes the decision. Health care and PBM services will be sold separately, but each of the three existing/emerging managed care/PBM groupings will obviously try and figure out ways to better integrate the health care and PBM offerings to make them more attractive to payors.

Finally, the negative issues that CVS has been having are more related to the drug store chain, where certain plans opted for a skinnier retail pharmacy network, and where CVS got cut out of several contracts, which stalled profit growth in the retail segment (not the PBM segment). The biggest hit to CVS retail pharmacies came from TRICARE (for which the PBM is ESRX) and where Walgreens presumably offered significant concessions so that they were able to get the CVS retail pharmacies kicked out of the network.

In any event, a lot of what we're seeing now from PBMs (and other health care organizations) are "value" focused programs meaning that there are either implicit or explicit guarantees to payors that if the payor adopts certain programs and offers them to plan members, the provider will provide some form of guarantee to the payor that it will ultimately reduce costs through lower rates of emergency room visits, hospitalizations, adherence, etc. Offering these types of programs requires organizations to have a deep level of experience in health care and drug utilization and cost efficiency. This is the type of knowledge that AMZN doesn't have and won't have unless it makes a significant commitment and investment in the industry. Playing on the periphery and being opportunistic may not be enough.

[Fobe]

I think you touch on a major point when you mention the inefficiencies in traditional retail pharmacy. I have friends who are pharmacists and they bemoan having to work a drive-up window and run a cash register while prescriptions are waiting to be filled. This is terribly inefficient on a number of levels. First, you are paying pharmacist wages for a cashier's job. Second, the bottleneck analysis says you try to streamline and not interrupt the rate limiting step in a process. This is the pharmacist checking the prescription. Anyone can answer the phone, run the register. or man the drive-up. If the pharmacist is doing these activities, your prescription volume drops. Why do you think doctors don't answer the phone, take payments, process insurance, or make appointments. If they did. they sure wouldn't see many patients. Finally, according to my pharmacist friends, studies show the number one cause of prescription drug errors is interruptions in the process. This of course besides the obvious incident of harming another individual opens you up to litigation as well as negative press.

[Evil Enantiomer]

Which is why you almost always buy the amazon scare dip, $WBA, has gained almost 10% since the announcement.

[Tigerkz3434]

I was just thinking.. someone needs to come up with an ETF that buys stock in companies that have recently been negatively affected by some type of amazon news. Then sell it when it gets back to where it was... you would make a fortune in investing in that type of ETF! I’ve made plenty doing it on my own!