Why Pharma Companies Should Be Scared

Pharmaceutical companies have generally responded with an apathetic irreverence to Amazon’s entry into the pharmacy space. However, there are dramatic changes that may impact pharmaceutical companies.

Number 1: Changing the Players

There have been certain internal hires within Amazon that support the suggestion that Amazon would acquire PillPack, but Amazon is looking to do more than just create a pharmacy. Amazon’s acquisition of PillPacksupports the argument that they’re trying to flatten the playing field for retail pharmacy.

Current Drug Distribution Pathway

Drug companies make drugs, and then typically give the drugs to one of three major distributors: AmerisourceBergen, Cardinal, and Mckesson. These distributors may distribute the drugs, directly or in turn sell to smaller distributors who sell, to groups of purchasers called “group purchasing organizations (GPOs)”. These GPOs will buy medications in bulk (to get better pricing) and will give it to pharmacies that are part of the GPO. Each participant looks to create a profit for themselves, which dramatically increases the price of drugs.

Amazon, however, has been excellent at creating key relationships directly with manufacturers, even sometimes creating products with their own name on them. If Amazon can directly strike a deal with a pharmaceutical company, it can skip that distribution chain and go directly from the pharmaceutical company to the patient. In such a situation, all of “middle-men” companies would disappear as would the profits they charge. With this method, even if Amazon charges a hefty premium for their product, they can still get the drug to the patient at a cheaper cost than the current system.

Number 2: Pharmacy Benefits Managers (PBMs) Payor Pathway

Most major health insurers do not directly address or negotiate drug prices. Insurance companies contract with major prescription drug benefit managers (PBMs) to negotiate with pharmacies.

These deals have increasingly come under scrutiny since the President believes that such deals play a major role in the increase of drug prices. Additionally, some payors have used gag clauses to prevent pharmacists from telling patients when buying drugs directly for cash would be cheaper than paying the co-pay. Increasing scrutiny has also revealed that PBMs used “spread pricing” to obtain an obscene amount of profit and this impacted patients.

Amazon’s ability to bypass the distribution pathway may also enable it to avoid the payor pathway. Amazon’s ability to obtain discounts with bulk medication purchases may avoid the use of rebates and coupons if they offer to sell directly for cash at a lower price than co-pays may allow. Alternatively, providing an Amazon Prime Medical could provide a PBM like an alternative to traditional PBMs. They can eliminate discounts and rebates and directly connect the pharmaceutical company through Amazon to the patient. Such a direct relationship with the patient would be a massive benefit for the pharmaceutical company since it could charge a much lower price for the product. On the other hand, Amazon could charge a premium and still come out ahead. Alternatively, Amazon has explored offering its own insurance system, or even its own health offering after learning from existing PBMs.

Number 3: Direct-to-Patient Delivery and Pricing Transparency

Pharmaceutical companies have experimented with direct to patient deliveries. However, this has been with one-off products and has had limited success. Amazon could take the model mainstream and eliminate pharmacies from the middle chain. With President Trump insisting on price transparency in advertisements, a rebate-less/couponless system would allow for maximal price transparency.

Number 4: Supply Chain

Until now, Amazon has mostly been delivering consumer goods. However, Amazon will need to address special drugs like biologics that have specific temperature considerations or controlled substances which may have specific security considerations. Amazon does not have a demonstrated ability to control delivery. That can be hugely problematic for pharmaceutical companies because that may change how they develop drugs. If the primary distributor cannot handle those drugs, having those drugs would be hugely problematic and it would change the calculus on which drug candidates are pursued.

Number 5: Track and Trace

Amazon has routinely sold things from other countries in the US and has not done a good job in policing the source of/authenticity of products. However, drugs are required to have a tighter and closed-loop distribution platform. Pharmaceutical companies may struggle with Amazon buying drugs at a discounted price (for example, from Canada or Mexico) and re-importing those drugs. Alternatively, buying drugs from countries like China may result in flooding the market with counterfeit drugs. If Amazon finds it difficult to control the authenticity of supplies, when applied to drugs, track and trace requirements as proposed by the FDA will gain importance.

Number 6: Over-the-Counter Drugs

Amazon has already announced that it already has over-the-counter drugs branded by Amazon’s personal brand. So they have already entered that market and if they start selling enough volume, they can drop the price. This is something to think about if you are a pharmaceutical company because Amazon could go from being a partner to a competitor.

Number 7: Research and Development (R&D)

Pundits argue that Amazon is going to start discovering drugs by getting into the Clinical Research Organization business. Amazon’s business model does not support discovery and instead focuses on its core strength of distribution. Accordingly, it is unlikely that it will enter the drug discovery business in the short term.

Number 8: Rebate System

PBMs routinely benefit from rebates where they are rewarded for ensuring that enough of a certain drug is used by patients. President Trump has already targeted drug rebates as an unnecessary cause of high drug prices. He plans to deny the safe harbor afforded to drug rebates under the anti-kickback law. This would effectively make such rebates illegal. Amazon could simply charge cash prices and not use rebates. This would step around PBMs and yet provide Amazon a significant margin.

Number 9: Amazon’s Impact

While Amazon may not want to start a CRO, it is a data analytics company and is collecting huge amounts of data regarding its customers, and potentially of its patients. So while they may not enter the clinical research business like other CROs, they could use real-world evidence to help CROs and pharma companies. For example, Amazon could help with a virtual clinical trial by delivering the drugs directly to the patient in a blind format. They could then turn around and use the data of patients that were chosen for their benefit. While Amazon may not become involved in R&D by becoming a CRO, they could become involved in R&D by identifying patients for future clinical trial studies. Amazon becoming a pharmacy would be another step to provide them with unprecedented access across a range of retail outlets.

Number 10: Alexa

With the rise of virtual assistants, Amazon could use Alexa to talk to patients about their drugs and allow for education using this format. This would enable Alexa to provide a medication guide for patients. Going further, Amazon could use its data collection to revolutionize how patients interact with drug information. Through iterative design methods, Amazon could even optimize the medication guide.

Number 11: Telepharmacy

As we know, Amazon came out recently with their video-enabled version of Alexa. Alexa could be used to connect patients, pharmacists, and doctors with pharmaceutical companies and each other. This on-demand education at the point of care would be a highly effective way of using the Amazon ecosystem to educate doctors and patients and to connect patients with caregivers. It could also dramatically change how patients engage at the moment they want to engage with people who could educate them.

Number 12: Alternative Sources of Pharmaceutical Agents

Unlike what many people think, pharmaceutical companies are often just large sized kitchens that mix ingredients together. It is theoretically possible for pharmaceutical companies to order active and inactive pharmaceutical ingredients through Amazon instead of developing their own distribution chains. Amazon’s extensive recording keeping would provide information that could change how products are collected, created and curated. This collected data goes beyond the basics by including information such as records of batches delivered, sources of batches and expiration dates, and crucial information not considered appropriate for public access.

Conclusion

Until Amazon makes a move, it’s difficult to tell what their actual plans in the healthcare industry are. Amazon’s clear motives as a data analytics company, its AWS servers, and its entry as a major marketing resource all position Amazon to win in the pharmacy business. If you have any questions about the ethics of the Amazon discounting medications on a Prime Day discount type sale, reach out to me on Twitter, LinkedIn, or onDarshanKulkarni.com.

I also host a podcast called Gavel and Pestle, a show dedicated to the fusion of law and pharmacy. You can listen to it here or search for the Pharmacy Podcast Network wherever you listen to your favorite podcasts.

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