NCPA Executive Update

NCPA Executive Update delivers insights on legislative, regulatory, policy, and industry developments from NCPA CEO B. Douglas Hoey, Pharmacist, MBA, to NCPA members and pharmacy leaders every Friday.

Amazon - Community Pharmacy Friend or Foe? | NCPA Executive Update | May 26, 2017

by NCPA | May 26, 2017

Dear Colleague,

Doug Hoey

Last week, CNBC reported that Amazon was investigating getting into the pharmacy market. This has been rumored for many years—Amazon seems to be into everything else, why not pharmacy? If true, what would be the impact on community pharmacy?

Amazon has become the latest 800-pound retailing gorilla like Walmart before it and Sears Roebuck (which also began as a mail order company) even before that. The immediate reaction to the CNBC report is to forecast that this would be bad for community pharmacies and ultimately bad for the millions of patients they serve. That could be a correct prediction, but here are some reasons why it may not.

Getting into the retail pharmacy business is different than other lines of work because of the many regulations and laws with which pharmacies must comply. There are inefficiencies in the system, but most of those are created by the way the U.S. health system delivers care and not necessarily by the pharmacy. What's more, pharmacy in the U.S. is unique in that PBM middlemen make the pricing decisions. Pause on that for a moment.

Amazon sells merchandise, but a big part of its business is as a merchandise traffic cop for third party sellers. In 2008, it was reported that 40% of its sales come from third party sellers. In that function, Amazon acts as a middleman like an Orbitz or a hotels.com. It could be said that PBMs consolidate sellers like an Orbitz or Amazon, but with at least one HUGE exception.

Number one being that with Orbitz, airlines, hotels, and car rental companies are still able to decide what price to charge. Orbitz doesn't set the price for them. Consumers can go on-line and decide which price and company they want to go with. For example, if a flight on American is $500 and a flight to the same destination is $505 on Delta, I can decide to pay the cheaper fare or, if I like Delta better, I can pay the extra $5 and fly with them instead. PBMs, on the other hand, mask that transparency that exists with an on-line consolidator.

Additionally, Amazon, like most companies, is attracted to business lines with higher margins. As I wrote a few weeks ago (Executive Update, May 5, 2017, "How Much $ Should a PBM Make on an Rx?"), the average EBITDA per prescription for Express Scripts is $6.15. The closest figure to EBITDA for independent pharmacies is below $2 and the pharmacy takes on all of the risk of carrying the product, dispensing the product, counseling the patient, getting paid, assuming liability, and providing other services. For an outsider thinking about jumping into the pool, which line of business would look more attractive?

Amazon also delivers its goods increasingly fast and increasingly predictably. Amazon has even built distribution centers in densely populated areas that allow for same-day delivery service. Sound familiar? According to the 2016 NCPA Digest, sponsored by Cardinal Health, 65% of community pharmacies provide same-day delivery in their areas. That capability for community pharmacy is already in place.

Another market that has been disrupted by a technology start-up is the taxi cab industry. Uber and Lyft have changed how people get around. That industry was ripe for disruption because for many people the taxi experience was lousy.

Is there a parallel in the retail pharmacy sector? Maybe. For some people, getting a prescription is a total pain. Long waits. The pharmacy is out of inventory. Anti-Cheers experiences where no one in the pharmacy knows your name. That's definitely not the experience in typical community pharmacies, which have been highly rated for decades in surveys of patients by Consumer Reports. That said, consumers are fickle, so all the more reason to double down on the enhanced pharmacy services that differentiate you, like delivery, special packaging, compounding, and medication synchronization to name just a few.

When Jeff Bezos was deciding on what to name Amazon, at one point he decided on relentless.com. Even now, that website redirects to Amazon. Amazon entering the prescription drug business should not be ignored or taken lightly. However, independents have a lot of assets in their corner and wouldn't have survived the many challenges over the years without being relentless. Maybe we have more in common with Amazon than what we thought?

Best,
Doug Hoey