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April 17, 2018

Why Amazon just abandoned its big plan to sell Rx drugs to hospitals

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    Amazon Business has suspended a plan to sell and distribute pharmaceutical products, opting instead to sell "less sensitive" medical supplies to health care facilities, according to sources familiar with the matter, CNBC reports.

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    According to CNBC, Amazon in 2017 considered entering the pharmacy business to sell and distribute pharmaceuticals. Over the course of a year, Amazon received approvals from 12 state pharmacy boards to become a wholesale pharmacy distributor and began selling its own line of over-the counter health products. Both moves indicated Amazon's growing interest in entering the health care sector, CNBC reports.

    Amazon pauses plan to sell pharmaceuticals

    Amazon had planned to sell and distribute pharmaceuticals in bulk to large hospitals, but the company faced significant setbacks, the sources told CNBC.  

    For example, Amazon could not convince large hospitals to move away from their current processes for purchasing pharmaceuticals, which "typically involve[e] a number of middlemen and loyal relationships," according to CNBC. Amazon had convened an advisory board with major hospital executives in an effort to secure pharmaceutical contracts with large hospitals networks. However, sources told CNBC the company was unsuccessful because many of the hospital systems had long-standing contracts with distributors such as McKesson and Cardinal Health. According to CNBC, some health systems also own a stake in the group purchasing organizations that negotiate contracts on the hospitals' behalf.

    Tom Cassels, head of strategy and business development at Leidos Health, said of the news, "It's very difficult to replicate the Amazon buying experience in health care. … The hospital and health care systems have entangling alliances with their existing purchasing and supply chain partners."

    In addition, Amazon is not yet selling certain, high-risk products—called "Class III" devices—that hospitals need, which further deterred large hospitals from entering into contracts with the company, CNBC reports. For instance, Amazon does not sell devices that must be implanted into the body that are designed to sustain life, such as pacemakers.   

    According to CNBC, Amazon also lacks the appropriate logistics network or infrastructure to handle temperature-sensitive pharmaceuticals. Amazon would have to develop a warehouse and logistics infrastructure to store and deliver temperature-sensitive pharmaceuticals before it could enter the pharmacy industry, CNBC reports.

    However, constructing the necessary infrastructure could prove costly for Amazon, according to CNBC—and sources familiar with the matter said Amazon sellers who sell such products currently rely on customized delivery processes. A seller of a health care product on Amazon—who spoke under the condition of anonymity so as not jeopardize the business relationship with Amazon—said, "You can't use FedEx or UPS trucks for delivery of these products. … It would be a massive undertaking (to build the infrastructure)."

    Amazon shifts focus to smaller buyers, sources say

    As a result of the setbacks, Amazon has decided to shift its focus toward selling less sensitive medical supplies to small clinics and hospitals, the sources told CNBC.

    Amazon for years has been selling such products—including gloves, glucometers, and stethoscopes—to smaller practices in the health sector, such as dental offices, free-standing ambulatory surgery centers, and physician practices, CNBC reports. The company according to its website has the necessary licensure to distribute such products in 47 states and Washington, D.C

    According to CNBC, several physicians have said that while they intend to remain in contracts with their current distributors for most supplies, they might use Amazon for certain items or in emergency cases.

    Amazon remains interested in pharmacy space, according to sources

    Regardless of the latest strategic decisions, however, Amazon still appears to be mulling a move into the pharmacy sector at some point, CNBC reports.

    Several reports have speculated the company may enter the prescription drug business for direct-to-consumer products. According to Axios' "Vitals," pursuing direct-to-consumer pharmaceuticals would enable Amazon to sidestep some of the obstacles it faced with hospitals, since the direct-to-consumer sector doesn't have the same purchasing agreements. That said, Amazon would face "bigger" regulatory hurdles in that space, "Vitals" reports.

    Sources familiar with the matter also said Amazon could reconsider its plan to enter the pharmaceutical sector once the company acquires more scale.


    News of Amazon's decision drove stocks for drug distributors and drugstore chains up, Reuters reports. Drug distributors McKesson, AmerisourceBergen, and Cardinal Health saw stocks rise 2% to 3%, while drugstore chains Walgreens Boots Alliance and CVS Health both saw stocks increase about 5%.

    Ross Muken, an Evercore ISI analyst, said, "After months of hype and fear it appears now that Amazon’s entry into the drug distribution space has been indefinitely delayed." He said Amazon will likely continue to focus on selling dental and medical products.

    Vishnu Lekhraj, Morningstar analyst, said, "Even with Amazon's large war-chest, it is still a difficult prospect given the dynamics of the whole pharmaceutical market"(Kim/Farr, CNBC, 4/16; Mishra, Reuters, 4/16; Baker, "Vitals," Axios, 4/17; Sanborn, Healthcare Finance News, 4/16)

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