Amazon and Express Scripts… Do You ‘ship It?

With Amazon courting the idea of getting into the pharmacy business… and Express Scripts (ESRX) feeling the abandonment of losing Anthem… Could this be the opportunity for a fantasy wedding… an arranged marriage… or are we merely speculating on an unlikely relationship?

Amazon has upended all retail models, and if they were to make serious inroads into pharmaceutical delivery, drone drops could change the landscape for CVS and make The Corner of Happy And Healthy a very different place for Walgreens. Here are three reasons this could be a decent proposal:

  1. The timing is right.  Big box retail has suffered the effects of over-building, mass merchandisers and online retailers. It’s driven down costs and the slimmer margins have forced big box retailers to assess profitability and footprint. Many are strategically targeting brick-and-mortar closures and/or downsizing. With CVS and Walgreens holding approximately 16,000 big box pharmacies, they aren’t immune to these pressures and certainly took notice when Amazon announced their intentions to enter the pharmacy business. It’s perfect timing for Amazon to enter the competition.
  2. They’re compatible.  Their combined expertise diminishes Amazon’s barriers to entry.  While Amazon has experience securing and establishing product partnerships, and they possess the necessary logistics and distribution channels for secure payments, order processing, and shipping/tracking, one has to admit that fulfilling a request for a few items in a cart is somewhat different than selling prescription drugs – FDA and other regulatory issues will be new to Amazon. But handling authenticated prescriptions, checking for product (drug) interactions, and navigating the minefield of validating insurance coverage and co-pays in a highly regulated market is something Express Scripts knows well. Amazon could acquire Express Scripts’ established relations and contracts with product suppliers in pharma; and perhaps Amazon’s negotiating skills could prove useful to ESRX, where customer relationship management is concerned! (Anthem is 30% of Express Scripts’ business.)
  3. The dowry is losing value.  How will ESRX fare without the Anthem business (their contract runs until 2019) ? And what is the fate of the Pharmacy Benefits Manager (PBM) model? With greater scrutiny over prescription drug pricing, consumers have lost faith that a PBM’s intent is truly to reduce prescription drug costs; they want transparency to see that negotiated savings from drug manufacturers actually make it past the pharmacies and plan sponsors, to benefit consumers/patients. So if this model is changing, and Express Scripts has lost a huge portion of their business, where does this leave them? How can they salvage their business when there are no stores to close, and downsizing means losing negotiating power and assuming more risk? That only leaves the consumer experience… in a market where comparison shopping is finally having its day. Who does this better than Amazon? Combine the shopping experience of convenience, cost-comparison, and consumer reviews,  with Amazon’s need for expertise in the prescription drug market, and ESRX has some appeal. Likewise, consider Express Scripts’ recent missteps and their obligation to produce shareholder value, and Amazon represents promising potential to eliminate the middleman and reinvent ESRX.

So while they both stand to benefit from a relationship with each other, can Amazon afford to spend the billions needed to acquire ESRX?  With its share price nearing $1,000, it certainly provides Amazon with “cheap currency” for acquisitions.  While Express Scripts’ market cap declined from over $60B in 2015 to less than $40B today, Amazon’s rose from $140B in 2015 to $475B now. Are there cheaper dates? The CVS change was comparable to ESRX (from over $120B in 2015 to around $80B now), but Walgreens (WBA) remained fairly constant at $90B over the same time period. We could speculate on which holds greater value, how retail business will fare, and what will be the fate of PBMs. But for now, we’re simply intrigued by the possibility of a relationship between ESRX and Amazon. We ‘ship it.

Jodie Warner & Dave Lerman

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