Thursday, November 02, 2017

The Latest on Amazon’s Pharmacy Ambitions—And a Possible Express Scripts Collaboration

Speculation about Amazon’s intentions for the drug channel has reached a new high. Below, I briefly review the recent news and hype.

Amid the hubbub, you may have missed intriguing comments from Tim Wentworth, president and CEO of the pharmacy benefit manager (PBM) Express Scripts. On an earnings call last week, he explained how Amazon could partner with the largest (for now) PBM via Inside Rx, the Express Scripts-GoodRx drug discount partnership. I explain the economic logic for both companies below.

Amazon will reportedly decide on its pharmacy and/or PBM strategy by Thanksgiving. We’ll see if I have been talking turkey or am just full of stuffing.

AMAZON MANIA

Last week was a crazy one for Amazon-watchers.

On Thursday, the St. Louis Post-Dispatch broke the news that Amazon has wholesale distribution licenses in 12 states. It’s not clear if Amazon intends to use these licenses for distributing pharmaceuticals or for its existing B2B medical product business. The stock prices of drug wholesalers and chain pharmacies plummeted anyway.

In Amazon’s Push Into Pharmacy Business Is Full of Promise and Pitfalls, The Wall Street Journal reminded investors that Amazon may not automatically dominate the industry. I added my $0.02 to the article:
“Amazon has built its business dealing with first-party payment—the consumer,” said Adam Fein, president of Pembroke Consulting, which advises on the drug-distribution chain. “It’s a very different business when the consumer is sharing the cost with a third party.”
I still think my semi-skeptical article from May—A Reality Check on Amazon’s Pharmacy Ambitions—remains valid.

Meanwhile, various newspapers are linking Amazon to CVS Health’s bid for Aetna. In CVS Is Said to Be in Talks to Buy Aetna in Landmark Acquisition, The New York Times wrote:
“The talks between CVS and Aetna appear to be in part an attempt to fend off a move by Amazon into the drug selling business—or at least to insulate the companies in case Amazon does invade.”
INSIDE RX FOR AMAZON RX?

On last week’s Express Scripts earnings call, CEO Wentworth was peppered with multiple questions about Amazon. Click here to read the transcript.

Wentworth supported the idea of a “disruptor” such as Amazon targeting the cash-pay market. He then added the following intriguing statement, whose meaning may not be immediately clear:
“I think there absolutely is a population there that deserves good service. We think we're doing a great job through our Inside Rx initiative, but we certainly see that as something where if they wanted to move into a space, we could be a very natural collaborator.”
Got that?

Here’s my thinking about the motivation for an Amazon collaboration built around Inside Rx. For background on Inside Rx, see Five Fun Facts About the New Express Scripts-GoodRx Drug Discount Partnership.

As a PBM, Express Scripts’ core business by definition services people who have insurance. Since Inside Rx focuses on the cash-pay market, Express Scripts generates revenue from prescriptions that it would otherwise not process.

Express Scripts profits in multiple ways from Inside Rx:
  • It earns a fee from pharmacies to administer the program. (GoodRx gets a portion of this fee.)
  • Inside Rx is a partially owned subsidiary of Express Scripts, for which Express Scripts serves as the PBM. Inside Rx retains a portion of the rebates negotiated with manufacturers. It also earns admin fees on manufacturers’ payments.
  • There is no large plan sponsor behind the scenes that is forcing Inside Rx to pass through rebates and admin fees.
Given this money flow, it makes sense for Express Scripts to partner with Amazon and grow the cash-pay Inside Rx business. Amazon could become a new, high growth channel for the program.

Meanwhile, Amazon gains the opportunity to process cash-pay prescriptions without having to build or buy the infrastructure to adjudicate third-party paid prescriptions. Additionally, many pharmacies are resistant to discount card programs, but Amazon is never shy about sacrificing profits for market share.

There are clear risks to Express Scripts. The short-term gains from Inside Rx could eventually be swamped because Amazon will have a solid foothold in the drug channel. The initial exuberance will fade if Amazon can leverage its role—especially if Amazon acquires GoodRx.

One thing is certain: The Amazon insanity will continue to build with every new rumor!

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