What Amazon Could Do to the Business of Selling Prescription Drugs

Investors sold off shares of pharmacy giant CVS Health and Walgreens on Wednesday amid renewed speculation that Amazon would enter the business of selling prescription drugs.

In trading Wednesday, CVS shares dropped 3.5 percent and Walgreens dropped 3.3 percent.

A day earlier, CVS and Walgreens shares had tumbled almost 4 percent after CNBC reported that the online retail giant is considering wading into the complicated retail pharmacy market. The news organization reported that Amazon is hiring a general manager to lead a team to explore the idea but hasn’t made a final decision.

An Amazon spokeswoman did not immediately respond to a request for comment. (Amazon chief executive Jeffrey Bezos owns The Washington Post.)

Selling prescription drugs is a big business in the United States – retail pharmacy is a $400 billion industry, according to an analysis by Adam Fein, president of Pembroke Consulting. Fein said that he could see Amazon most easily entering the market for patients who pay cash, such as for generic drugs or brand-name drugs with discount coupons from manufacturers. Those patients may choose to pay for the drugs themselves because they’re uninsured or they’re looking for a better deal than what they would get through their insurer, which could debit the drug’s entire list price from their deductible.

“Prescription drugs is such a big market, and Amazon, I think, looks at every big market and figures out if there’s a place for them to play,” Fein said, estimating that the company could capture 5 percent to 10 percent of the market if they put enough resources behind the effort. “I think they would challenge the economics of the retail pharmacy industry.”

The pharmaceutical industry has been criticized for lacking transparency. Drug list prices do not reflect what most people eventually pay for the medicines, and secret rebates and discounts flow between various middlemen in the industry. Many patients who go to fill a prescription have little idea what price they’ll be charged at the pharmacy counter or whether they could get that drug cheaper elsewhere.

“Having a new competitor in the market would be great. Having a competitor that would potentially be transparent would be potentially even more interesting,” said Kevin Schulman, a professor of medicine at Duke University who has studied the web of financial relationships between drug companies and patients.

Schulman said the most disruptive and profitable opportunity for Amazon would be to partner with health plans offered by employers, since many people with insurance simply use whatever is covered by their plan. Capturing that market would require Amazon to make deals with insurers or employers.

He noted that Amazon could also face challenges related to government regulations and patient privacy requirements, which differ from typical retail. Knowing what online shoppers have put in their carts or plan to buy can be used to try to sell other items to the consumer.

“If Amazon would know that you have diabetes or hypertension they could do a lot with that data,” Schulman said. “In principle, they could set up a marketplace where they behave differently, with different rules and different privacy practices.”

One way for Amazon to access the prescription drug market would be to acquire smaller companies already doing commerce in the space, Fein noted.

Doug Hirsch, the co-founder of GoodRx, a website that enables consumers to compare prices of prescription drugs at retail pharmacies and offers coupons, said that Amazon’s entry has long been rumored and that the shopping site could be a welcome addition. He said his company is seeing business from consumers who are shopping around to pay cash directly without going through their health plan because their deductibles are high.

But he echoed Schulman’s caution that the regulatory landscape would make disruption more complicated than a typical retail market.

“There’s been at least a dozen companies popped up trying to be the Amazon of prescriptions,” Hirsch said. “It’s a complicated sell. It’s not like the traditional consumer buying experience because of the lack of price transparency and the many steps that have to go into the flow of purchasing a prescription.”