The prospect of Amazon.com Inc. and its business-to-business segment entering the business is beginning to cause far-reaching reverberations for a range of companies, jarring the shares of drugstore chains, drug distributors and pharmacy benefit managers, and potentially precipitating one of the biggest corporate merger deals this year.
Pharmacy benefit managers, or PBMs, administer drug benefits for employers and health plans, processing the prescriptions pharmacies dispense.
On Thursday, the pressure was plain to see. A report that Amazon had received pharmacy wholesaler licenses in a dozen states triggered a fast and steep selloff that wounded the likes of McKesson Corp., AmerisourceBergen Corp. and Cardinal Health Inc. And late in the day, shares of Aetna Inc. surged after a Wall Street Journal report that it’s in talks to be taken over by CVS Health Corp. for more than $200 a share.
CVS and Aetna have held discussions about a potential deal, according to people familiar with the matter who asked not to be identified as the details aren’t public. Representatives for both companies declined to comment.
Executives in the drug industry say that Amazon could use its expansive online reach and its logistical muscle to threaten companies that ship and sell medicines to consumers and cut pricing deals with drug makers. “Size and scale-wise, they can disrupt anywhere they want to disrupt,” said Chip Davis, president of the Association for Accessible Medicines, a trade group for generic medication, in an interview Thursday.
A deal for Aetna could conceivably move CVS further away from the business of bricks-and-mortar retail drugstores and deeper in health services such as pharmacy benefits, where it already has a sizable presence. Combining Aetna and CVS would create a health services giant and a bigger competitor for UnitedHealth Group Inc., which is the largest U.S. health insurer and has its own clinics and a pharmacy benefits unit.
The presence of Amazon is already being felt by retailers and companies that sell drugs over the counter. The head of Bayer AG’s consumer-health business said on a conference call with analysts Thursday that the wider shift to online shopping by U.S. consumers was hurting its business. Erica Mann, the division’s chief, dubbed it the “Amazon effect,” saying buyers are looking for value.
At the same time, the pecking order in the health supply chain is beginning to shift.
Earlier this month, insurance giant Anthem Inc. said it was cutting ties with Express Scripts Holding Co. after a long dispute over pricing and starting its own PBM business in 2020. A bulked-up CVS and Anthem’s new venture could raise the pressure on Express Scripts, which has touted its independence.
Any tie-up of Aetna and CVS would follow a pair of failed mergers among health insurers. The deals would have reduced the ranks of big U.S. health insurers from five to three, a prospect that led the Justice Department to oppose both prospective tie-ups. If the Aetna deal happened, “CVS would have a dominant position” in the drug benefits business, said Michael Rea, founder of Rx Savings Solutions, which has an app that helps patients find low cost drugs.
Analysts have speculated that Amazon could soon enter the business of selling prescription drugs, threatening to disrupt retail drugstores, drug wholesalers and the PBM business. “Amazon has proven itself adept at applying scale economics to multiple industries,” says Andy Hoar, a B2B e-commerce expert. “The wholesale pharmacy space is ripe for Amazon’s model.”
While Amazon has never publicly commented on what its plans may be, CNBC reported this month that the Internet giant could make a decision about selling drugs online by Thanksgiving. The network didn’t name its sources.
McKesson slid 5.2% at 4 p.m. yesterday in New York, while AmerisourceBergen shares fell 4.2% and Express Scripts sank 3.7% following the report on Amazon’s state licenses by the St. Louis Post-Dispatch.
Bloomberg News confirmed that Amazon had obtained wholesale pharmacy licenses in at least 13 states, including Nevada, Idaho, Arizona, North Dakota, Oregon, Alabama, Louisiana, New Jersey, Michigan, Connecticut, New Hampshire, Utah and Iowa. An application is pending in Maine. Some of the licenses were obtained late last year and some this year.
Amazon declined to comment.
The licenses could be part of Amazon’s business-to-business sales effort, which would include sales to hospitals, doctor’s offices and dentists. Amazon on Tuesday announced “Business Prime Shipping,” which brings the quick delivery associated with Amazon household orders to workplaces.
The Seattle company launched Amazon Business, No. 91 in the 2018 B2B E-Commerce 300, in 2015, offering tractor parts, latex gloves, file folders and millions of other products needed in factories, hospitals, schools, and offices. Businesses are shifting their supply shopping online from less efficient methods such as browsing print catalogs, faxing orders and telephoning sales representatives.
Online B2B sales will grow to $1.2 trillion in 2021 from $889 billion this year, according to Forrester Research Inc.
On a conference call Thursday with analysts, McKesson CEO John H. Hammergren said the wholesaler doesn’t “take the entry of any competitor lightly,” but said the company already has a large online order operation and similar to what Amazon does logistically. “To some extent, we were Amazon before it was cool to be Amazon.”
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