Amazon drives down prices of anything it sells and as (if) jt enters the pharma distribution business, what will be its effect on Indian generic drug producers that depend on US sales?
Generic producers have come under intense pressure to lower prices and this will continue with Amazon’s entry. Given US FDA observations on manufacturing facilities, generic producers will have to both spend on plant upgradation and at the same time keep costs down, which will impact margins substantially. Companies that focus on new approvals and molecules will be the ones growing while others flounder under intense pricing pressures.
The e-commerce giant Amazon has reportedly set a November deadline to decide on whether it will move into the drug supply chain market or not. Should Amazon decide to make a move, the company could help to dramatically drive down the cost of drug prices. However, many details are still unclear, such as the type of business model that Amazon is likely to pursue if it decides to enter the market.
As per the report released by Morgan Stanley, Amazon in the first phase could open “virtual retail pharmacies,” leveraging its Prime Now network for millions of U.S. consumers to buy drugs online and may also use a lighter brick and mortar store to drive prices down.
Amazon has also received approval for wholesale pharmacy licenses in at least 12 states, including Nevada, Arizona, North Dakota, Louisiana, Alabama, New Jersey, Michigan, Connecticut, Idaho, New Hampshire, Oregon, and Tennessee.
Amazon has a long-standing interest in prescription drugs, an industry with multiple middlemen, long supply chains, and opaque pricing. In the 1990s, the company invested in start-up Drugstore.com and Amazon Chief Executive Officer Jeff Bezos sat on the board. Walgreens eventually purchased the site and shuttered it last year to focus on its own branded website Walgreens.com.
Conceptual model of the flow of products, services and funds drugs covered under private insurance and purchased in a retail setting
source: USC Schaeffer Center
Beneficiaries and sponsors pay premiums to a health plan, in exchange for drug coverage benefits for plan members. The health plan or self-insured employer contracts with a PBM (Pharmacy Benefit Managers) to manage the plan’s drug benefits in exchange for fees and payments. The PBM negotiates with drug manufacturers to provide preferred formulary placement for the manufactures products, in exchange for discounts from list price, rebates, incentives and other fees payable to the PBM.
PBMs are not a well-known part of the U.S. pharmaceutical system and have come under scrutiny in the last year amid public outrage over drug costs. The fact that PBMs negotiate discounts from drugs total cost, critics charge that they also push prices higher to make their discounts appear more favorable.
If the online retail giant does enter the pharmacy market, it would pose “an immediate near-term threat” to retail pharmacy chains such as CVS Health Corp. and Walgreens Boots Alliance Inc and to the Pharmacy Benefits Managers (PBMs) such as Express Scripts, CVS Health, Optimum Rx who commands around 70% of the market.
However, it doesn’t pose much of a risk to the generic drug makers. As Amazon could establish relationships with the drug makers directly reducing heavy dependency from distributors, PBMs, and retailers. If this relationship is successful than the rebates and other discounts that are currently retained by companies including the pharmacy benefits managers could pass directly to the consumers.
source: USC Schaeffer Center
The US is the most important market for the Indian companies as it contributes 40-60% of revenues to companies like Sun Pharma, Cipla, Lupin, Aurobindo and many of these companies are already reeling with pricing pressure and rising competition in their US businesses. The US generics market is valued at around USD 60 billion, with India’s share USD 9-10 billion.
The pressure on the domestic generics drug maker should not increase any further due to Amazon’s entry into pharmacy market than it already has after recent rounds of channel consolidation in the US as many wholesalers and retailers have become strategically aligned. Amazon will simplify the pharma supply chain network and will reduce the pricing power of wholesalers, PBMs, and retailers which might have neutral to positive impact on generic drug manufacturers but will certainly benefit the consumer at large.
