Drugstore operator CVS Health Corp.'s (CVS) $66 billion offer for health insurer Aetna Inc. (AET) was prompted in part by concerns that Amazon.com Inc. (AMZN) was readying a push into the world of pharmaceutical drugs.
Citing a person familiar with the matter, The Wall Street Journal reported that with expectations growing that the Seattle-based e-commerce giant was planning to enter the market as a wholesale distributor, CVS started looking for ways to counter that, and acquiring a major health insurer was among the strategies presented to company directors. On Thursday, the Journal reported CVS made a more than $200 per share offer for Aetna, valuing the deal at more than $66 billion. (See also: Evaluating Amazon's Chances in the Pharma Industry.)
In the spring, shares of CVS and other drugstore operators tanked after reports surfaced that Amazon was eying their market. The stocks were under pressure again Thursday after the St. Louis Post-Dispatch, using public records, reported that the online retailer won approval from 12 states to sell pharmaceuticals. The states to approve the license are Nevada, Arizona, North Dakota, Louisiana, Alabama, New Jersey, Michigan, Connecticut, Idaho, New Hampshire, Oregon and Tennessee. Amazon is currently awaiting confirmation from the state of Maine. A person familiar with the matter told the Journal the licenses are needed in order for the company to sell medical wholesale equipment to professionals through its business-to-business marketplace. (See more: Amazon Has Wholesale Pharmacy Licenses in 12 States: Report.)
Disrupting the Drug Biz
It's not just drugstore operators that will be threatened by Amazon’s move into the pharmaceutical industry. It could also impact drug wholesalers and pharmacy benefit managers that negotiate drug prices for insurers.
For months, the drugstore operators had been dismissive of the idea of Amazon moving onto their turf, even though they were constantly asked by analysts about it. In June, Walgreens CEO Stefano Pessina said it was unlikely Amazon would enter the market, telling the Journal that Amazon is likely focused on other categories that are “much, much simpler than health care, which is a very regulated business.”
More recently CVS’s Chief Executive Larry Merlo said the industry would “rise to any challenges” from new players, saying there are a lot of hurdles to overcome, reported the Journal. He pointed to the fact that many consumers prefer to get their drugs via mail order subscriptions or at physical stores. Still, many industry watchers think it's the ideal market for Amazon to enter and disrupt similar to what it did with bookselling. In a recent research note, Leerink Partners said brick-and-mortar pharmacies will be hurt by Amazon’s entrance because it will lower store traffic and reduce sales of items people purchase when picking up their medicine at the drugstore. “Amazon’s entry is expected to pose an immediate near-term threat to retail pharmacy chains,” wrote Leerink Partners in the recent research report.