Mergers and Acquisitions and Competition…Oh, My!

It is widely known that pharmacy chains are attempting to claim a bigger stake in healthcare, whether through acquisitions of health plans, distribution services, or other partnerships. Much of this is in response to Amazon’s interest in entering the pharmacy market… again. It seems Amazon bit off a little more than it could chew when trying to disrupt the pharmacy space the first time around— Drugstore.com ring a bell?

The folks at Amazon may have failed once before, but that doesn’t mean they won’t try from another vantage point. “In the United States, we process and pay for almost 6 billion 30-day-equivalent prescriptions a year for a population of 326 million people,” said Adam Fein, chief executive of the Drug Channels Institute. “We’ve built a very complicated infrastructure to do so, and that infrastructure cannot be easily dismissed. Amazon could try to compete on price, but the profitability and margins on generic drugs at pharmacies are not large. It’s not really clear what advantage they have.”

Walgreens, CVS taking steps

Two of the biggest drug chains, Walgreens and CVS, are working feverishly to make their mark. Walgreens has not yet indicated whether it intends to acquire a health plan, but it makes sense considering the competitive landscape. CVS has recently received shareholder approval to buy Aetna in a $69 billion cash and stock acquisition. The two companies are hoping to gain approval from the Department of Justice in the latter part of 2018.

Walgreens already has part ownership in the big distributor AmerisourceBergen, and rumors abound that Walgreens may buy the balance of the company to post roadblocks for Amazon. Like Amazon, AmerisourceBergen ships products all around the world.

Amazon in the fray

Many are betting against Amazon’s ability to penetrate a well-established market. However, with its deep pockets and other resources, as well as the lessons learned from previous attempts, Amazon should never be counted out. Patrick Finnegan, an analyst with Fitch Ratings, states, “[Amazon] is getting educated… They really need to build a better value proposition before they can come in to disrupt very established players. These are very capable companies.”

All of this activity has jump-started other companies to get in while the getting is good. Albertsons plans to acquire Rite-Aid, and Cigna wants to capture Express Scripts. The stated hope for some is to cut healthcare costs through a community-based healthcare model. However, with big companies buying other big companies, an increase in any company’s shareholders’ earnings can’t be overlooked. We can only hope that the good of the many prevails over the good of the few.

Rod Faulkner, Analyst

Rod Faulkner joined MD Buyline in 1996 with more than 15 years of business management experience.