NEW YORK (Reuters Breakingviews) - Amazon.com is a prescription for pharmacy woes. The internet retailer has set its sights on the $300 billion business of selling drugs to U.S. customers, according to CNBC. Regulation and delivery concerns are barriers. Yet these, and the inefficiency of U.S. healthcare, also promise lucrative earnings for a company happy with razor-thin margins.
Jeff Bezos’ $450 billion company may have started out a bookseller, but it has steadily plugged new offerings into its online retailing machine. It now sells nearly everything imaginable, from food to shoes to internet and payments services. Yet Amazon has avoided selling drugs.
That’s understandable. Most states require pharmacies to be licensed and registered before they are allowed to ship medicines to consumers. The convoluted and opaque relationships between the insurers, drugmakers and pharmacy benefit managers who negotiate the price tags and discounts make it difficult for outside distributors to both break into the field and make an adequate profit.
Shipping to customers may also be a problem. Major chains offer mail delivery, but they have storefronts for a reason: people in serious pain, looking for antibiotics for a sick kid or needing life-and-death treatments probably want to fill their prescription immediately. Amazon can’t offer that and can’t even provide same-day delivery in many parts of the country.
Yet operating margins for major drug chains like Walgreens Boots Alliance and CVS run about 5.5 percent. That’s nearly twice as high as Amazon eked out in 2016 after years of barely breaking even. The higher margin looks tempting despite the impediments. And Bezos must be hoping selling medicines will mean more orders for gadgets, books and online video, just as the likes of Wal-Mart and Costco sell drugs as a way to bring customers into stores in the hope they’ll buy other products.
Moreover, Amazon’s history of relentless expansion into areas supposedly protected from online competition – such as pet food, shoes and construction materials - means pharmacies shouldn’t rest easy. No wonder stocks in big drugstore chains like CVS and Walgreens Boots took a hit. Their margin looks like Amazon’s opportunity.