"The Amazon death star has finally released their long-anticipated plan to sell drugs through Amazon Pharmacy but calling for the demise of retail pharmacies such as Walgreens and CVS a little premature? "
By: Allan R Kirby
Drug Store Meltdown
Today it finally happened, Amazon (NASDAQ: AMZN) announced Amazon Pharmacy where Prime members can get discounts of up to 80% on generic drugs and 40% on brand-name medications when paying without insurance. This is all the result of Amazon buying the drug-delivery startup called PillPack in 2018 for US$753 million.
Amazon Pharmacy will not only offers discounts for generic and brand-name medications benefits, but Prime members can also get unlimited free two-day shipping. Plus Prime members who don’t have insurance can even use one of Amazon's 50,000 partner pharmacies in the U.S. to get discounted drugs.
The announcement resulted in CVS Health (NYSE: CVS), Walgreens Boots Alliance (NASDAQ: WBA), Rite Aid (NYSE: RAD), and GoodRx Holdings (NASDAQ: GDRX) have seen their stocks get crushed, especially GoodRx which went public recently. This is actually the second time we have seen the drug store stocks take a beating from Amazon, the first time is when Amazon bought PillPack back in 2018.
Why drug stocks took a hit
Amazon's entry into the pharmacy business has spooked many investors who do not want to be on the wrong side of Amazon. This is not surprising as the sell-off of pharmacy stocks follows a long pattern of stocks getting hammered when Amazon enters a new market. This was most evident when Amazon announced its deal to buy Whole Foods in 2017, many grocery store stocks such as Kroger and Costco were very hit hard. Secondly, many analysts cite how Amazon destroyed the book/publishing industry as a good example of what could happen to a sector when Amazon enters an established market.
But could Amazon destroy the pharmacy retail business?
The retail pharmacy business is already a low margin, highly competitive industry, and it has been consolidating for years. It can be arguably said there are only two major players in the market CVS and Walgreens, with Rite Aid, Costco's and Walmart being seen as large but still smaller players in the business.
CVS and Walgreens have not been sitting idly by, Walgreens for example has been getting its act together by cutting costs, adding new services, such as having DoorDash to deliver over-the-counter medication and other products from its drugstore. They are also moving further into healthcare with the VillageMD deal to open approximately 500 to 700 doctor offices in drugstores over the next five years. Most of the primary-care clinics will be around 3,300 square feet.
The same goes for CVS which is now a fully integrated health care company with its purchase of health insurer Aetna and the roll-out of 1500 new health clinics along with over 1,100 MinuteClinic. As for Rite Aid, they are still a turnaround story and are considered much weaker and significantly than CVS and Walgreens. They do not have the scale that CVS or Walgreens has but they could end being acquired, if not they will survive but admitting they will be challenged.
Although analysts cite the book and publishing industry of how Amazon is crushing the industry, I am still waiting for this to happen with the Whole Foods deal. There is no question Amazon is incredibly competitive but they are not dominating the grocery business. In fact, since 2017 German grocer Lidl entered the US market, Costco's has thrived and Kroger is doing just fine. Additionally, as CVS and Walgreens build out a much deeper healthcare business model, they could, in fact, take market share from other industries as well. Although short-lived, the positive news the Walgreens and CVS will be administering the COVID-19 Vaccine to Americans in Long-Term Care Facilities Nationwide does show their scale and capabilities in healthcare.
GoodRx is an issue with Amazon's entry
The new service offering from Amazon could hurt GoodRx for two principal reasons which are;
1. The discounts for Prime members will apply to customers who don't pay with insurance but want to pick up medications in person at more than 50,000 brick-and-mortar pharmacies. This as you know is the GoodRx business model. Basically, GoodRx offers its users prescription discounts using their discount cards or coupons on their digital platform at most brick-and-mortar pharmacies.
2. Amazon has a huge customer base through its prime membership, GoodRx currently has only a few million and Amazon's entry could eat into their customer base and stall growth. It also did not help GoodRx's shares were already well above 25+ times estimated sales.
What to do with CVS, WBA, RAD, GDRX stocks?
The announcement of Amazon's entry into the online pharmacy business will be an overhang for the stocks of CVS Health (NYSE: CVS), Walgreens Boots Alliance (NASDAQ: WBA), Rite Aid (NYSE: RAD), and GoodRx Holdings (NASDAQ: GDRX). The sell-off is not surprising but a little premature as it could take months, if not years for us to fully understand how this will play out. Long term CVS and Walgreens Boots Alliance will likely survive and continue to expand deeper into healthcare. However, Rite Aid and GoodRx are more vulnerable, but it's really GoodRx that could see some longer-term damage to its stock and business model.
Amazon will take market share and will likely take a leading role in the online line pharmacy market. The question is how much market share will they take and over the long term will consumers shift to Amazon for their medication. I am still skeptical that Amazon will cause damage to Walgreens or CVS sales however I do see significant pressures on the remaining regional pharmacies as well as independent pharmacies.
Disclosure: mysmallbank.com nor the author received any compensation from the mentioned security for this article. The article is our opinion only and is written to help readers learn more about the stocks mentioned in this article. Consider this as basic information only and utilize professional services and additional sources before making an investment decision.