How Amazon becoming a pharmacy could lower the price of drugs, according to Morgan Stanley

Key Points
  • Morgan Stanley outlines a multi-phase plan for Amazon to get into the drug supply chain.
  • If Amazon is successful, it could result in substantial cost savings for consumers.
Jeff Bezos
Shannon Stapleton | Reuters

Morgan Stanley has a new report out for investors that outlines how Amazon's potential push into pharmacy would benefit consumers.

In the first phase, the authors speculate that Amazon could open "virtual retail pharmacies," leveraging its Prime Now network for millions of U.S. consumers to buy drugs online.

"Amazon could use a lighter brick and mortar footprint to drive pricing down," the report reads.

It would not be a huge challenge for Amazon to become a pharmacy and get added to existing pharmacy benefits managers' networks, the authors suggest. The reason for that is that "employers are already inquiring about Amazon's potential role," which means that pharmacy benefits managers would be unlikely to lock Amazon out.

Secondly, the company could establish relationships with manufacturers of inexpensive generic drugs.

And finally, and most critically, Amazon would build partnerships with makers of branded drugs.

If the company is successful, Morgan Stanley expects that the rebates and other discounts that are currently retained by companies including the pharmacy benefits managers could "pass back to consumers."

All of this could take a "long time," according to the researchers, but it's doable for a company with Amazon's resources and scale.

Late last week, CNBC reported that Amazon will make a final decision in the next four to six weeks about whether it will move into the drug supply chain. It's still an open question for the company, as pharmacy is a huge market but is highly complex.

Pharmacy stocks plummeted in the wake of the news report.

While CVS Health, Rite Aid and Walgreens are considered to be most at risk, Morgan Stanley suggests that some companies in the drug supply chain are more insulated. These include Diplomat, as Amazon might not touch the specialty drug market, and UnitedHealth's Optum, which may be a potential partner rather than a competitor.

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