Amazon.com Inc. AMZN +0.77% ha
Amazon’s potential entry into the pharmacy-services industry helped spur CVS HealthCorp.’s CVS -2.84% $66 billion bid for insurance giant Aetna Inc., AET +0.04% a
CVS and its rivals have been under pressure to devise a counterattack should Amazon enter their turf. The company’s stock, along with its rivals, took a hit when news of Amazon’s potential plans surfaced in May. Shares fell again Thursday after the St. Louis Post-Dispatch reported that Amazon had obtained approval from several state pharmaceutical boards to become a wholesale distributor. CVS and Walgreens shares dropped roughly 3% on the news.
The licenses are necessary for selling medical wholesale equipment to licensed professionals via the company’s business-to-business marketplace platform, according to a person familiar with the matter. Still, Amazon is looking at getting into the pharmaceutical space, according to another person familiar with the matter, as the company continues to expand its business.
CVS felt further compelled to make a dramatic move after federal antitrust regulators rejected Walgreens Boots Alliance Inc.’s proposed acquisition of Rite Aid Corp. in June, the person said. The death of that deal solidified the view that the solution to intensifying competition must come from beyond traditional channels.
CVS and Walgreens have been wading ever deeper into health care as retail sales of cosmetics, grocery items and other merchandise count for a shrinking share of their overall revenue. Both chains have grown their pharmacy benefit and health-care businesses in recent years. For CVS, retail sales amounted to 46% of total revenue in 2016, down from 52% in 2013. For Walgreens in the U.S., that number fell to 33% last year, from 37% in 2013.
Last year, CVS reported $120 billion in revenue from its pharmacy-services segment and $81 billion from the retail side of its business. Those figures include $23.5 billion of overlapping sales. About 75% of the net retail revenue comes from prescription drugs.
At almost every opportunity, analysts have peppered CVS and Walgreens executives with questions about their plans to handle the Amazon threat, especially after the Seattle giant acquired grocery chain Whole Foods.
In June, when asked about Amazon’s move to hire a manager to develop a pharmacy strategy, Walgreens CEO Stefano Pessina said Amazon’s entry into the industry was unlikely. “They have so many opportunities around the world and in many other categories, which are much, much simpler than health care, which is a very regulated business,” he said. “So as they are a very good team and very rational team, I believe that in the end, this will not be their priority.”
From the Archives
A few months later, CVS Chief Executive Larry Merlo said the industry would “rise to any challenges from any new entrant.” He noted several hurdles to entering the industry, including the fact that most consumers opt against mail-order drugs, regulatory challenges and the complexities of juggling physicians, pharmacists and insurers. “We’ve seen threats in the past, OK,” he said.
Asked about Amazon’s interest in health care on its earnings call Thursday, director of investor relations Dave Fildes said that most of the company’s energy is currently focused on its Amazon Business offering to hospitals, labs and government agencies, as well as interacting with that sector via its cloud services business.
E-commerce hasn’t taken root so far in the pharmacy business. Many prescriptions are filled at brick-and-mortar pharmacies like CVS, which has about 9,700 locations. Walgreens is the largest U.S. chain with about 12,000 locations world-wide. Other prescriptions are filled by the retailers’ mail-order arms or other mail-order pharmacies. And Amazon would have to navigate a host of complicated logistical, administrative and reimbursement challenges.
But health-care industry officials say the pharmacy market is ripe for e-commerce, much like book selling was, especially if Amazon can provide the kind of one-click convenience it offers for books, clothes and other products.
“Amazon’s entry is expected to pose an immediate near term threat to retail pharmacy chains” including CVS and Walgreens, Leerink Partners wrote in a recent note to investors. The analysts said brick-and-mortar pharmacies would be hit especially hard because the loss of store traffic would hurt sales that come with patients visiting the pharmacies to pick up a prescription.
Corrections & Amplifications
The St. Louis Post-Dispatch reported that Amazon.com Inc. received approval for wholesale pharmacy licenses in several states. An earlier version of this article incorrectly stated the newspaper’s name as the St. Louis Dispatch. (Oct. 26, 2017)
—Jonathan D. Rockoff contributed to this article.
Write to Sharon Terlep at sharon.terlep@wsj.com and Laura Stevens at laura.stevens@wsj.com
Appeared in the October 27, 2017, print edition as ‘A Force Behind the Aetna Bid: Amazon.’
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CVS adds next-day prescription delivery as threat of Amazon competition looms
By Carolyn Y. Johnson Washington Post, November 6 at 4:38 PM
Amid broad anticipation that Amazon will soon get into the pharmacy business and
disrupt the business of selling prescription drugs, pharmacy giant CVS Health
announced Monday that it would launch a next-day prescription delivery
service nationwide.
Amazon’s entrance into the pharmacy business has been widely predicted by Wall
Street — although the company has given no indication of its plans. But Amazon
is thought to pose the biggest near-term threat to retail pharmacies such as CVS,
Walgreens Boots Alliance or Walmart.
Starting in December, customers can take advantage of free, same-day delivery in
Manhattan — a service that would expand to the District, Miami, Boston,
Philadelphia and San Francisco in 2018, CVS announced. It said next-day delivery
would roll out nationwide next year.
Outside experts see the announcement as evidence that competition is working.
“The prospect of Amazon entering has motivated CVS to do something they probably
should have done years ago,” said Adam Fein, president of Pembroke Consulting. “I
think it also is a great signal that Amazon is not going to be able to walk into the
pharmacy or pharmacy benefit management industry and immediately take it over.
There are many large, sophisticated, well-entrenched competitors who are going to
defend their turf.”
[Fears of Amazon moving into prescription drug sales are already disrupting
health care]
Fein said that the pharmacy business has been slower to evolve than other retail
sectors. People do not shop for prescription drugs as they do for other consumer
goods — because they must receive permission, in the form of a prescription, to buy
the drug and then depend on insurance to pick up most of the tab.
“CVS did announce that the company will introduce one-day prescription and same-
day delivery in select urban markets. . . . Some would view this as a defensive move
due to Amazon’s potential entry into the market,” Ann Hynes, a managing director at
Mizuho Securities wrote in a research note.
Martin Gaynor, an economist at Carnegie Mellon University, said that the mere
threat of Amazon competition is likely to be good for consumers.
“That’s what can happen when you get a fairly mature and staid industry where no
one is innovating and everything is done a certain way, and an upstart threatens to
come in,” Gaynor said.
CVS executives said the company is offering the service because it is always listening to
its customers.
“Getting a prescription in 15 minutes or less is super convenient, but we wanted to
add on to that. And so that’s why you see us announcing what we did today,” Helena
Foulkes, executive vice president at CVS Health, said during an earnings call.
A potential merger between CVS and the health insurer Aetna, first reported by the
Wall Street Journal, is seen as a defensive move against possible Amazon entry by
some experts — although others see it as a response to pressures in the health
insurance industry and the business of negotiating drug prices. CVS executives did
not comment on the possible merger.