Amazon's (AMZN) Challenge to Pharmacies Worries Markets

No industry likes to hear that Amazon.com, Inc. (AMZN) is making inroads to its market. Amazon is no longer a scrappy start-up looking to disrupt booksellers but an internet behemoth with a market cap of over $1 trillion. Amazon has the size needed for a long fight against entrenched companies in an industry combined with a technology and data edge that can only be rivaled by other members of the FANG group.

So, when Amazon added prescription drugs to its target list, the market noticed. In this article, we'll look at this recent move and what it means for pharmacies in the future. 

Everything to Your Door

Amazon is a lot of things, including a web services firm, an advertising firm, a retailer, and an e-commerce platform. The e-commerce side of the business is still Amazon's biggest revenue driver, however, and it is constantly looking for ways to expand that footprint. Amazon's interest in prescription medicine is straightforward – the delivery of medicine at regular intervals fits well with the logistics system the company has built through its Prime shipping service.

Amazon took the first step toward Amazon Pharmacy with its acquisition of PillPack in 2018. This acquisition resulted in Amazon being licensed to fill prescriptions across the country, although it was done on a separate site. Amazon Pharmacy will sit within the Amazon main site and will allow Prime subscribers to get their medicine with free two-day shipping options.

Amazon plans on accepting insurance plans and offering discounts if users don't have coverage. The company has pegged the potential discounts as up to 80% off generics and 40% of brand-name medications. According to the release, the PillPack brand will continue to serve customers that are taking multiple daily medications to manage chronic conditions by pre-sorting their doses for them.

Pharmacies in the Train Tracks

Pharmacies knew that Amazon's entry into their market was a matter of if, not when. Some reacted by trying to build out their own rapid delivery services, but pharmacies like CVS Health Corporation (CVS), Walgreens Boots Alliance, Inc. (WBA), and Rite Aid Coporation (RAD) are still built around foot traffic. They want customers in their locations picking up related items as they wait for prescriptions to be filled. Walmart Inc. (WMT) is in this mix as well, but its business, much like Amazon's, is far more dispersed. For the traditional pharmacies, Amazon is looking to remove the key reason for customers to go to their locations.

Prior to the pandemic, the market would have likely taken a more skeptical view of Amazon's move, noting that less internet-savvy shoppers will still be going to their neighborhood pharmacy as always. By and large, however, the pandemic has made all of us more internet savvy as a matter of course, forcing even the most traditional shoppers toward e-commerce.

On the heels of the Amazon announcement on Nov. 17, shares of CVS, Walgreens, and Rite Aid were all down. CVS and Walgreens were down over 8% and 9%, respectively, and Rite Aid tumbled over 16%. At the time of writing, the pharmacy stocks remain in the red, with Walgreens slipping to a 14% loss since the announcement.

Shares of drug distributors including AmerisourceBergen Corporation (ABC), Cardinal Health, Inc. (CAH), and McKesson Corporation (MCK) also saw modest dips following Amazon's announcement. However, these stocks were riding high off vaccine developments leading up to the news.

The Bottom Line

Amazon's official launch of Amazon Pharmacy is bad news for traditional pharmacies. While Amazon has not crushed every market it has entered, any product line it adds is exposed to more price competition that usually results in shrinking margins. Because pharmacies are dependent on foot traffic and add-on purchasing, the shift of more consumers online has a real impact.

Amazon Pharmacy doesn't have to maintain physical locations and inventories like its entrenched competition does, and it may be able to reach a scale where it can squeeze the supply chain all the way back to the drug manufacturers. Pharmacies have a long-term health problem now, and the medicine will be a bitter pill to swallow. Many of these chains will need to rethink their footprints and rework their business models if they don't want to lose market share to Amazon.