- The Washington Times - Monday, December 4, 2017

The Amazon effect has rocked bricks-and-mortar retail. Now it’s moving in on the health care market.

Analysts say CVS Health Corp.’s $69 billion bid for Aetna Inc., marking the first time a large pharmacy chain has merged with a major health insurer, is a direct result of Amazon’s plan to enter the prescription drug market.

“Everything Amazon does is disruptive; sometimes it’s just not clear how,” said Jason Bloomberg, CEO of Intellyx, a digital transformation consultant business.

The online retail giant made pharmacy chains nervous in October when it was revealed that Amazon had secured licenses to distribute prescription medicines in 12 states. CVS is believed to be making the Aetna deal to withstand a potential challenge from Amazon by creating a “one-stop shop” where consumers can get prescriptions, insurance coverage and treatment in one location.

By forcing CVS into the largest merger announced this year, Amazon is showing its might, analysts said. But they are unsure how Amazon will disrupt the health care sector — perhaps by acquiring a pharmaceutical manufacturer or by launching its own pharmacy benefits manager, or PBM.

Mr. Bloomberg said he wouldn’t be surprised if patients one day are treated at Amazon hospitals.

Amazon could tackle this from a couple of different ways,” said Mark Coker, CEO of e-book distributor Smashwords, who has studied Amazon’s business practices for many years.

Amazon has a penchant for upending even the most static industries, and unwary competitors have paid the price. About a decade ago, there were 37,500 bookstores in the U.S. Today, that number is about 22,000. When reports of Amazon launching an online real estate service surfaced this summer, online real estate giant Zillow’s stock fell by 5 percent.

Now Amazon appears to have its sights directly on the $3.2 trillion health care market, which accounts for 20 percent of the nation’s gross domestic product. Amazon’s health care dreams appear to extend beyond selling prescription medicines. The Seattle-based company has invested heavily in a number of health care markets, such as medical device sales and cloud information storage services.

Health care would be the next logical move for the retail behemoth, analysts said. Amazon broke into the grocery industry in July with the $13.7 billion acquisition of Whole Foods.

Mr. Coker said he believes Amazon’s most likely move would be acquiring a drugmaker. Reports surfaced last week that Amazon had “high level” meetings with Mylan and Sandoz, two generic drug manufacturers, but it is not clear what those talks were about.

“By acquiring a drug company, they can eliminate the middleman and sell those drugs directly with the licenses they are getting,” Mr. Coker said. “Amazon will look at the entire industry supply chain and every single cost and ask how it can do it more efficiently.”

On Sunday, CVS, the second-largest U.S. drugstore chain, announced it was making a $69 billion offer for Aetna, the third-largest health insurer. The mammoth acquisition would pair a company that runs more than 9,700 drugstores and 1,100 walk-in clinics with an insurer covering about 22 million people.

CVS Health Corp. is also one of the nation’s biggest pharmacy benefit managers, processing more than 1 billion prescriptions a year for insurance companies, including Aetna.

Buyer’s remorse?

If Amazon does acquire a pharmaceutical company, it could cause buyer’s remorse for CVS, Mr. Coker said. The retail pharmacy chain intends to finance the transaction with $45 billion in debt.

“This Aetna deal could be boneheaded if CVS’s goal is to shore up its defenses against an inevitable entry against Amazon into the market,” he said. “Health insurers are part of why drugs are so expensive. Amazon approaches markets by eliminating the middleman. It seems that CVS is making a bet that health insurers are going to continue to be the dominate intermediary between a consumer and drugmaker.”

Investors also appear to have doubts about how much the drugstore chain was willing to pay for Aetna: CVS Health Corp.’s stock fell $3.41, or nearly 5 percent, to $71.69 on the New York Stock Exchange, although the Dow Jones index was up strongly for most of the day.

Joel Espelien, a senior research analyst at The Diffusion Group, agreed that Amazon will put pressure on CVS and Aetna after the deal is completed.

“CVS didn’t want to just be a distributor, so it bought a health plan,” he said. “But disruption can change how business is done in that industry. Amazon will force CVS and Aetna to dramatically up their game.”

Even if Amazon’s first step in the health care industry is offering prescriptions through its website, Mr. Espelien said, that could create fierce competition in the sector. He predicts prescriptions will be delivered via drones within minutes along with other supply advantages that only Amazon can offer.

“It doesn’t mean CVS can’t compete with Amazon, but if they can’t match what Amazon is doing, they will be in serious trouble,” he said.

The time is right for Amazon to enter the health care industry because of its proven ability to reduce costs in an industry that has long struggled to keep expenses down and prices competitive.

“When I look at a retail pharmacy, it strikes me as fairly inefficient,” Mr. Coker said. “They have to maintain that expensive floor space, expensive pharmacist, cash register. Maybe you can achieve greater economies of scale by moving that to a call center in India like Amazon did with the book industry.”

This article is based in part on wire service reports.

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