Answer Question in 500 words: Taking into account everything Amazon has done on the pharmaceutical side of

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Question:

Answer Question in 500 words:

Taking into account everything Amazon has done on the pharmaceutical side of the healthcare business, is it strategic for Amazon to venture into other sectors of healthcare, such as hospital management, clinics, research, and development? Why or why not?

Abstract

As a large, global e-commerce company, achieving great success in the online market, Amazon’s purchase of online pharmacy, PillPack, caused a commotion among the current pharmacy players in revealing the company’s interest in entering the complicated pharmacy market. This case introduces the U.S. pharmaceutical supply chain, Amazon’s strengths in this particular market, and possible growth strategies that Amazon can employ leveraging these strengths to become a key player in the pharmaceutical business.

Case Learning Outcomes

Upon study and completion of this case, students will have an improved understanding of:

• the prescription drug market;

• Amazon’s strengths and weaknesses in its pharmacy venture;

• Amazon’s potential growth strategy in pharmacy/healthcare.

Introduction

In 1994, Jeff Bezos founded Amazon with the intent of “selling books to a mass audience through the internet” (Frey & Cook, 2004). Today, statistics show that Amazon is responsible for half of all U.S. e-commerce, with an estimated 50% of U.S. households holding an Amazon Prime membership and half of those shopping on Amazon weekly (Mims, 2019). In the first quarter of 2019, Amazon posted USD 59.7 billion in revenue, which is up 17% from the USD 51.04 billion predicted a year previously (Feingold, 2019).

in June 2018, Amazon stirred up the pharmacy field by announcing its acquisition of online pharmacy PillPack for about USD 1 billion. PillPack individually pre-sorts medicines and delivers them to patients, making it easier for people with chronic conditions to manage multiple daily medications (Pifer, 2019). Amazon offers PillPack as part of its Amazon Prime membership, giving customers the same type of online experience for their prescriptions, vitamins, and over-the-counter products as they get from other aspects of Amazon Prime. All members need in order to sign up is their list of medications, doctor’s information, insurance information, and payment method. PillPack then transfers all prescriptions, coordinates with doctors and insurance to gather prescriptions, and packages medications by time of day and sends them to the customer. They also offer 24/7 pharmacy support, automatic refills, and free delivery (PillPack, n.d.). Although this acquisition was fairly recent, Amazon’s interest in the pharmacy market is not new. In 1999, only 5 years after it started business, Amazon owned 40% of the online medicine retailer drugstore.com, which was eventually sold to Walgreens in 2011. Some insiders claim that Amazon holds annual meetings to discuss entering the pharmacy market and has hired 40–50 people who are reportedly looking into how to disrupt the entire drug supply chain (Davies, 2018).

Why Pharmaceuticals?

As a company originally built as an online bookstore, why should Amazon bother entering the highly regulated and controlled pharmaceutical business? The huge potential for profit is the most likely answer. Drug manufacturing companies such as Eli Lilly and Pfizer profited USD 4.2 billion and USD 3.9 billion, respectively, in just the first quarter of 2019 (Jagannathan, 2019). Between 2012 and 2017, the pharmaceutical industry grossed USD 174.1 billion in revenue with USD 39.2 billion in profits (Minimalist Pharmacist, 2018). Theamount of money in all aspects of the pharmaceutical supply chain gives plenty of opportunity for increased revenue. According to a report by QuintilesIMS Holdings, spending on prescription medicines in the United States will increase from 4% to 7% through 2021, reaching USD 580 billion to USD 610 billion (CNBC, 2017). In addition to the industry being highly profitable, there is also a need for accessible medication in rural areas. A study by Thomas Wroth and Donald Pathman (2006) found that patients who reported transportation problems were more likely to report primary medication non-adherence (not taking their medications as prescribed), primarily in rural areas where travel distances were greater, pharmacies were fewer, and public transportation was scarce. Chief executive of Pharma Dynamics Erik Roos stated, “The advent of online pharmacies creates opportunities for increased access to medicines, convenience, more competitive pricing and patient anonymity.” He added that “research shows that internet purchases are typically higher in rural areas where the distance to a pharmacy is likely to be greater than in urban areas, which is significant in the South African context where approximately 34.7% of the population live in rural areas and have to travel 25km, or more to access health care” (Geach, 2019). In the United States, 19.3% of the population live in rural areas that are often also in need of medical services, including pharmaceutical services (Lin, Shah, Mauntel, & Shah, 2018).

The Unique Market of Retail Pharmacy

Figure 1. Flow of Payment in the U.S. Commercial Pharmaceutical Supply Chain

The flow of the U.S. pharmaceutical supply chain can get complicated–something for Amazon to consider in its venture. To begin the pharmaceutical supply chain, drug wholesalers or pharmaceutical manufacturers supply retail pharmacies with pharmaceutical products (Figure 1). Drug wholesalers (e.g., McKesson, AmerisourceBergen) buy large quantities of products from different manufacturers and warehouses and distribute them directly to retail pharmacies. The wholesalers thus reduce the need for retail pharmacies to maintain relationships with drug manufacturers and help to reduce the retailers’ inventory costs. To profit, drug wholesalers mark up the pharmaceutical products they purchase from the manufacturer when they resell to the retail pharmacy (Brooks, Doucette, Wan, & Klepser, 2008).

Retail pharmacies (such as Walgreens, CVS, PillPack) purchase drugs from wholesalers (or in some cases directly from the manufacturer) and dispense the product to the consumer. Retailers are the final step in the pharmaceutical supply chain before the drug reaches the consumer, and their other functions include providing information to consumers about the safe and effective use of prescription drugs, facilitating billing and payment for consumers with insurance plans, and maintaining a stock of pharmaceutical drugs (Kaiser Family Foundation, 2005).

Generally, in the United States, people paying for prescription drugs from retailers are grouped as follows:

• 1. beneficiaries of government-based reimbursement programs (Medicare, Medicaid);

• 2. beneficiaries of private third-party reimbursement plans (e.g., Anthem, UnitedHealthcare); and

• 3. cash-paying customers.

These different ways in which people pay for their prescription drugs is a major difference separating the pharmacy business from the more usual retail transaction where a consumer pays directly, in whole, for the product/service they receive. For state-level reimbursement programs, the payment required is generally set at the drug acquisition cost plus a fixed dispensing fee, up to an amount called the maximum allowable cost (MAC). Pharmacy benefit managers (PBMs) act as an intermediary between insurance companies, retail pharmacies, and drug manufacturers. Insurance companies employ PBMs to set-up a network of retail pharmacies, develop prescription formularies, and negotiate discounts from pharmaceutical manufacturers that allow the particular manufacturer to gain “preferential status” on the PBM formulary (Brooks, Doucette, Wan, & Klepser, 2008). A PBM formulary is a list of drugs that are approved for reimbursement; therefore, a drug that makes it on the formulary is more likely to be prescribed, benefiting the drug manufacturers. Pharmacies also contract with PBMs to join their pharmacy network (a group of pharmacies that offer plan members lower prescription drug costs), providing pharmacies with stable reimbursement from private plans and access to more customers.

A recurring concept in the pharmacy business is vertical and horizontal integration. Vertical integration is a strategy where a firm acquires business operations within the same production vertically, within the supply chain (Kenton, 2019a). An example of this would be CVS, a retail pharmacy, and Aetna, an insurance company, merging to create one business. In doing so, costs can be reduced and efficiencies improved, such as the naming of preferred pharmacy networks and negotiations with reimbursement. Horizontal integration is the acquisition of a business operating at the same level of the supply chain (Kenton, 2019b). An example of this would be Pfizer acquiring Warner-Lambert, both drug manufacturers, to become the largest pharmaceutical company.

Already Ahead of the Game?

With the pharmaceutical industry seemingly stuck in the status quo with Big Pharma companies such as Eli Lilly, Pfizer, and Johnson & Johnson consistently making up a large share of healthcare industry profits, does Amazon stand a chance in entering and competing (Jagannathan, 2019)?

The first advantage that Amazon has when entering the pharmaceutical field is having already quietly laid out a foundation in the business. In 2017, Amazon had purchased Whole Foods Market for USD 13.7 billion, causing shares in major online drug stores and healthcare services to drop with the announcement of the acquisition. Additionally, UBS analysts have speculated that the purchase provides Amazon with physical locations that can be used to establish brick-and-mortar pharmacies, so creating an entryway into the pharmacy field (Davies, 2018). Another advantage for Amazon was its existing presence in over-the-counter medications. In February 2018, Amazon launched in the United States its “Basic Care” brand for over-the-counter products such as ibuprofen, antihistamines, and other supplements, adding to its already strong platform in the beauty and personal care market. Amazon also teamed up with Bartell Drugs to sell medical supplies and equipment, non-prescription drugs, and other goods (Moyen, 2017). Lastly, and quite importantly, Amazon has been working on the legal side of the business and has already gained approval to become a wholesale distributor from at least 12 states, including Nevada, Arizona, North Dakota, Louisiana, Alabama, New Jersey, Michigan, Connecticut, Idaho, New Hampshire, Oregon, and Tennessee (Liss, 2017).

Furthermore, Amazon’s general dominance on Wall Street further provides Amazon with a position to take over the drug industry, so much so that the “Amazon effect” has become part of everyday business parlance. Even the mere threat of Amazon entering the pharmacy market caused large chain pharmacies like CVS and Walgreens to feel the pressure to begin making big moves. CVS announced that it would be expanding its prescription drug delivery platform nationwide, and as of April 2019, offers same-day delivery to 6,000 CVS pharmacies for a flat rate of USD 7.99 (Pifer, 2019). Additionally, as alluded to earlier, CVS and Aetna have been trying to merge in preparation of Amazon’s entrance. Along with having a large amount of capital, Amazon has the advantage of being known and trusted by consumers worldwide; thus its entrance into the pharmacy field would be viewed positively by patients. A survey conducted by Wells Fargo analyst David Maris found that five in ten adults in the United States said that they would use or would probably use Amazon Pharmacy (Schwarzbaum, 2017).

The Current State and Next Steps for PillPack

Since acquiring PillPack in June 2018, Amazon has not yet made any large moves in the business. On April 24, 2019, some Amazon Prime users tweeted that they had received email marketing about PillPack. It is unclear, however, how many people have received the email or how Amazon is selecting who receives the emails (Paavola, 2019). Amazon seems to be remaining discreet concerning its future plans for PillPack and its venture into the healthcare field.

Amazon could grow its pharmacy business by applying its existing fast delivery resources to PillPack. Amazon was the first business to make 1-day delivery the norm and it is already experimenting with a new service, “Amazon Prime Air,” presenting it as a “future delivery system designed to safely get packages to customers in 30 minutes or less using unmanned aerial vehicles, otherwise known as drones,” and adding that “Prime Air has great potential to enhance services we already provide to millions of customers by providing rapid parcel delivery that will increase the overall safety and efficiency of the transportation system” (Amazon, n.d.). Amazon has yet to officially roll out the service, although the Prime Air website includes a video of the First Prime Air Delivery on December 7, 2016, and there are 61 job vacancies listed, as of April 2019 (Fruhlinger, 2019).

There may be good reason why it is taking such an advanced company like Amazon to finally launch drone deliveries, since there are a lot of limitations with this form of delivery. One limitation is the short-range technology of the current drone models, allowing most drones to only fly for about 20-minutes before battery recharging or replacement is required. Additionally, more advanced software is needed for piloting, as the drones would need to gather data in mid-flight and make adjustments to their flight plans to minimize collisions, deal with changing weather, or deal with a change in destination, if needed. Another limitation is that Federal Aviation Administration (FAA) regulations restrict where, at what time of day, and at what speed drones can fly (Lin, Shah, Mauntel, & Shah, 2018). There are also privacy concerns with drone delivery, which is an even greater concern when it comes to prescriptions. A mis-delivery or malfunction with the drone could result in prescriptions being seen by the wrong people, so breaching Health Insurance and Portability Accountability Act (HIPAA) rules, which are designed to protect the confidentiality of personal healthcare information. Lastly, there are also various pharmacy laws to consider along with the aviation regulations, as many U.S. states have specific laws regarding “automated drug delivery systems.” But if Amazon can overcome these limitations and launch Prime Air in conjunction with PillPack, medications can be delivered in under 30 minutes without the patient needing to leave home, which would be particularly useful for those needing acute medications and for those too sick to make the trip to the pharmacy.

Another device Amazon can employ into its pharmaceutical venture is Alexa, Amazon’s virtual voice assistant. If Amazon Prime or PillPack subscribers can use Alexa to request refills or check on their fill status, the smart assistant could make adherence much easier, especially for the elderly community. Related to this, there is talk that Amazon will be rolling out “digital mental health,” allowing patients struggling with anxiety and depression to talk to a therapist through Alexa (Evans & Farr, 2019). A recent patent filed by Amazon indicates that the company wants Alexa to be able to detect illnesses through the sound of a person’s voice. The patent is for a means to help Alexa detect and analyze such nuances as emotional states, the sound of the user’s voice or breath, what kind of location the person speaking is in (by analyzing background noise), and their accent and gender. Amazon plans on using this data to send targeted adverts to the user; for example for cough syrup when the user has a sore throat (Mehta, 2018). In the UK, Amazon partnered with the National Health Service (NHS) to provide tailored NHS advice so that people can use Alexa to receive accurate and current information about health. For example, when someone asks Alexa a question about their back pain, the answer returned has been approved by the NHS (National Health Executive, 2018). Additionally, Alexa can even monitor and analyze customer’s blood sugar results with a wireless glucose monitor (Hornigold, 2019). If glucose readings are continuously high, Amazon can leverage this information to sell them insulin, or if they’re low, it can sell them glucose tablets. Strategic use of Alexa in its pharmaceutical venture could enable Amazon to revolutionize the entire field, not only for ordering and receiving prescriptions but also for recommending over-the-counter products.

Amazon has also announced that it has partnered with six organizations including Express Scripts, Cigna Health, and Boston Children’s Hospital to build skills (Alexa applications) to “manage a variety of healthcare needs at home simply using voice—whether it’s booking a medical appointment, accessing hospital post-discharge instructions, or checking on the status of a prescription delivery” (Robles, 2019).

The biggest concern about relying on Alexa as a tool in healthcare would be the increased accessibility of people’s healthcare information, access to which is protected by the HIPAA. Keeping one’s own health information including physical and mental health conditions as well as personal identifiers such as birthdate and Social Security Number private is a significant worry for many people. With this in mind, Amazon has recently announced that the data-handling protocols for Alexa are now compliant with HIPAA regulations (Hornigold, 2019).

Be Cautious!

Although Amazon is a massive company that can put considerable resources behind its move into the pharmacy market, it is still possible that the experiment may not work out and will cost them substantially in time and money. In June 2019, Amazon was forced to shut down its 4-year experimental restaurant delivery service, Amazon Restaurants, which offered free food delivery within an hour or less as a service for its Prime members. However, Amazon was competing with other similar services such as GrubHub and UberEats, and failed to see significant growth–and hadn’t done much to promote the Amazon Restaurants service. This failed venture follows various others, including the Amazon Fire smartphone; Destinations, a travel site; and Amazon Local, an extinct online hub to find local deals (Herrera, 2019). Amazon’s history of ventures that failed to take off show that, even for a huge company, not all projects succeed.

Summary

with its large capital and as a global “household name,” Amazon appears to be making a strong and steady move into the pharmaceutical field. As the pharmacy market is highly complex with numerous players, it offers Amazon a great many different options for its next steps. Amazon has an astonishing amount of resources and has filed various relevant patents, enough to surpass the current biggest players in the field such as CVS and Walgreens, if the company approaches the development carefully. Regardless of what their next steps are, Amazon will continue to surprise the world with their determination to take on everything “from A to Z.”