Amazon Is Rumored To Enter The Pharmaceutical Industry — What Are The Implications? – jdr98 | Seeking Alpha

While the transition to buying medicine from an online pharmacy would be an adjustment for older consumers, a horizontal movement by Amazon into pharmaceuticals may entice this demographic to use this platform for its convenience of home delivery.  Once they are familiar with Amazon’s business model and core value proposition, it is fair to assume that they might buy other products on the website as well.  Amazon would be able to then analyze the purchasing habits of these customers, giving them an opportunity to cross market and, ultimately, cross sell additional goods and services to more baby boomers.

In order to operate as an effective online pharmacy, Amazon must consider two strategic options: They can either outsource drug pricing negotiation and services to a large Prescription Benefits Manager (PBM), or vertically integrate by buying a smaller PBM and redesigning how it operates within the healthcare industry. In the pharmaceutical industry, the PBMs are the gatekeepers — they manage health plans, benefits, and treatment costs for employers and insurance companies.  At this point in time, Express Scripts, CVS, and OptumRx control about 80% of the PBM market, and thus have a high degree of bargaining power when it comes to negotiating with pharmaceutical producers for the prices of drugs.  All pharmacies use PBMs to handle their negotiations with drug companies and thus, Amazon must consider how to approach this key component of the value chain.

By outsourcing and partnering with a large PBM, Amazon would be able to rely on their partner’s experience of the industry.  The PBM that they partner with would already have all the insider knowledge needed to do the job.

Furthermore, since a large PBM could handle all of the negotiations and contracts with insurance companies, Amazon would not have to directly participate in these negotiations, and could instead focus on the supply chain and distribution of the pharmaceuticals.  A larger PBM would also provide a network of customers to which Amazon could access and sell to.

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Amazon Is Rumored To Enter The Pharmaceutical Industry — What Are The Implications? – jdr98 | Seeking Alpha.