Why Amazon Needs To Partner With Or Buy A Pharmacy Benefit Manager

Amazon.com, Inc. AMZN is expected to take a big step into pharmacy ━ because it can.

“We think that Amazon will enter the retail pharmacy industry, in large part because this is a large and disruptable market,” Bernstein analyst Lance Wilkes said in a Thursday note.

But its entry will be neither passive nor casual: “We think Amazon is well positioned to address [and] impact the major customer issues in this market.”

By Wilkes’ estimate, Amazon can capitalize on the $300 billion industry’s high single-digit margins by exploiting a lack of pricing transparency, expense inefficiencies and competitors’ weaker e-commerce infrastructure.

A Team Effort

The company won’t likely achieve this on its own, according to Bernstein.

“We do expect that Amazon will need to partner with or acquire a PBM [pharmacy benefit manager] to drive volume growth,” Wilkes said.

He sees ideal partners in OptumRx and other large PBMs owned by managed care organizations, and attractive takeover targets in small PBMs with “low mail order penetration and limited economics,” like MedImpact or Rite Aid Corporation RAD’s EnvisionRx.

At the same time, he foresees partnership interest from UnitedHealth Group Inc UNH.

The Amazon Impact

Amazon’s existing online interface and capacity to automate distribution position it for sector-wide disruption, driven primarily by reducing operating cost standards and slashing retail prices by about 10 percent, according to Bernstein.

“The major advantages come from eliminating 70,000 retail locations (and related staffing and other expenses), which could be replaced by automated distribution centers with efficient pharmacist oversight,” Wilkes said.

By these considerations, Amazon’s entry into the space would negatively impact PBMs and independent pharmacies, while proving “somewhat negative” for national retailers and distributors.