Amazon has been developing its pharmaceutical capabilities. Although the company is responsible for a small market share of a few hundred thousand customers, an expert Third Bridge spoke to suggested that it was only a matter of time before Amazon does to pharmaceutical distribution what it did to bookstores in the 1990s. In any case, Amazon’s entry into this sector could prove disruptive owing to its use of technology and ability to scale quickly. At present, this industry is dominated by a handful of wholesalers and established distributors.
In mid-2018 Amazon bought Pillpack, a bulk medicine and treatment mail-order distributor, and it is now targeting its customers with pharmaceuticals. Amazon is aiming its services at chronically ill people who need a long-term and predictable source of drugs. Owing to its technological superiority over competitors, Amazon will be able to rapidly automate processes to lower costs and raise margins. By increasing pack sizes – currently distributed in 30-day doses – and making it easier to change orders mid-cycle, it could gain market share from competitors. In addition, Amazon has been white-labelling generic drugs. This means it is rebranding drugs made by other companies. Customers then become accustomed to seeing Amazon’s name associated with medicines and treatments, according to the former staffer. “People would rather have something that is branded than not when it comes to medications,” she said.
However, there are elements to pharmaceutical distribution that Amazon’s size and mass-distribution capabilities will not help with. A Third Bridge Interview with a former executive Amerisourcebergen Corp (ABC), speculated that Amazon may have overlooked the complexity of this market. Rather than just delivering a third-party-supplied package or box, there are relationships with the end-client that are alien to the Amazon business model. Unlike operating a sales platform for many thousands of retailers through its regular business, relationships between pharmaceutical manufacturers, wholesalers and distributors have been built up over decades. This might mean that Amazon is unable to demand its usual significant discounts.
A growing part of the sector that is not catered to by Amazon is speciality medicine. The Amazon model – high volume and low margin – is not built to excel at distributing niche products. Specialised medicine requires expert knowledge, and operates at a much lower volume but significantly higher margin. This is an area that its competitors are focusing on, and one that is seeing a surge in new products. The recurring sentiment in last quarter’s Interviews was that both established and new players in the pharmaceutical distribution sector needed to be creative as they fought for market share. Margins are being driven down, partially by the dropping cost of prescriptions.
One way to increase market share is through M&A. And pharmaceuticals is consistently one of the top sectors for M&A activity in the US. Our specialists believe this trend will continue – especially for Amazon, because, as one of the world’s largest companies, it is capable of buying instead of building.
There are other looming challenges for the pharmaceutical industry, with the legal repercussions from the opioid crisis on the horizon. In an Interview with Third Bridge in August, a pharmaceuticals and life sciences lawyer outlined the potential impact of the suits against opioid manufacturers and distributors.
Manufacturers were the first targets, with OxyContin supplier Purdue being the initial defendant. However, the scope soon expanded. Other manufacturers saw how profitable these drugs could be and started selling their own products or generic versions through wholesalers and distributors. This fuelled an epidemic in the country.
It has been estimated that the sector could face multiple billions in damages, which could vary for manufacturers and distributors. It is likely that distributors would not only have to show how many of these drugs they supplied to end clients – but also prove how much of the supply looked suspicious and should have been flagged, like over-prescription in small states. With data on drugs, suppliers and end-clients relatively freely available, this should not be too difficult. But it will take a considerable amount of time.
As a result, it is expected that significant sums will be set aside for legal considerations – but this may just be for administration. The significant impacts will take place in 2-4 years’ time, giving courts, plaintiffs and companies time to assess the potential fallout. Furthermore, there is likely to be various pre-trial settlements. That way, companies avoid costly – and potentially reputation damaging – legal investigations, or evidence being made public and reported on by the media. In fact, some firms in the sector are already seeing their share prices slump. This could convince company boards to hold off on M&As until a more realistic price can be attained. The financial impacts of the awards or settlements could themselves also be a precursor to buying activities.
These developments add to the uncertainty facing the sector in America. With the global economy affecting people’s ability to pay for even routine drugs, pharmaceutical wholesalers and distributors are facing a more volatile time than they have in decades.
The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.
For any enquiries, please contact sales@thirdbridge.com
