What would it mean if Amazon expanded into pharma

Steven Loeb · May 19, 2017 · Short URL: https://vator.tv/n/499b

The effect it would have on Amazon, pharmaceuticals and other companies in the space

Some of the biggest tech companies have been staking their claims in the healthcare space in the last few years. Companies like Google and Apple have been investing for a while, while newer companies like Uber have also begun dipping their toes in the water as well.

Now it's Amazon's turn. Earlier this week, it was reported by CNBC that the company is looking to enter a new space: pharmaceuticals.

So far, the report, which said that Amazon is hiring a business lead for the space, as well as other recruits from the pharmacy industry, has not been confirmed. However, if it is true, then it would be a potential game changer for Amazon and for the pharmaceutical space more broadly.

Such a move would potentially give Amazon an even bigger advantage over its competitors, and possibly make the pharmaceutical industry more transparent.

A game changer for Amazon

Taking this step could have a seismic impact in a few different ways, one of which is on Amazon's business.

The company, which recently announced that sales in the first quarter were $35.7 billion, with net income of $724 million, is currently the biggest online retailer, by far, with more than half of all online sales in 2016. Nobody can come close to touching it.

Getting into pharmaceuticals would only expand its dominance in e-commerce. There are more than 4 billion prescriptions ordered last year. Globally, the pharma market is expected to reach $1.12 trillion by 2022, according to data from market research firm Evaluate Pharma. If Amazon could grab even a percentage of that, it would be a goldmine.

Investors I spoke to in the healthcare space see this as a potential game changer for Amazon. 

"There are some unique characteristics of the pharmaceutical business with which Amazon has little experience, so I expect a steep learning curve, and they may not see great success out of the gate," said David Wu, General Partner at Maveron.

"At the same time, no one is better than Amazon at leveraging scale to sell commodity products with little brand differentiation direct to consumers, so I think they could dominate the category in the long term."

“It’s an eminently logical extension of Amazon’s quest to supply all atoms to the human race: if you sell cars, computers, and condoms, why not also drugs?  Authenticating prescriptions is trivial.  What would excite me as an Amazon shareholder is that Amazon’s customers would be disclosing unprecedented levels of intimate medical detail to everyone's favorite, almighty online retailer," said Patrick Chung, founding partner of Xfund.

To Stephen Kraus, Partner at Bessemer Venture Partners, healthcare is "the natural next place" for Amazon to go.

"I just think it makes sense. Amazon, as far as I can see, owns the shopping experience. They are trying to own your consumer wallet in many ways. The things you used to go to the mall or the hardware store or the bookstore to get, they want to be the one-stop-shop on the Internet to provide those goods. And they do it in a very consumer friendly way, through an amazing technology experience," he said. 

"They have been thoughtfully and systematically taking over consumer purchase behavior and the wallet, but one thing has been missing: healthcare. It's 20 percent of GDP. They were missing exposure to a fifth of the economy."

It seems likely that pharma might just be the first step that Amazon will be taking in the healthcare space.

The effect on pharma

The other major effect will be on the pharma space. Paul Willard, General Partner at Subtraction Capital, expects to see Amazon bring more transparency to the market.

"As a consumer it would be great to see Amazon bring the price transparency and competition that they have brought to so many opaque markets into the pharmaceutical space.  It would be yet another great example of tech finally moving into health, and boy does our country's health delivery system need it," he said.

"The ACA got the ball rolling on tech attacking these very large, highly-defended markets. In a sense, Amazon entering the fight would be a continued progression of that arc. The battle to fix America's broken health delivery systems and business models would add another important front."

Kraus had a different take. While he does believe that Amazon will be able to drive prices down on generic drugs, much like other retailers, such as Walmart, have done with pharma, and which Amazon has been able to do in other verticals, he told me that he doesn't think the same can be said patent protected drugs, with novel therapeutics, where there's no competition.

"I don’t think Amazon will be able to make a dent in drugs with novel therapeutics, like for rare diseases. Things change when there's public outrage over them charging $100,000 a pill, but I'm not sure Amazon will be able to do anything there, since they are patented and there isn't a corollary in the market," said Kraus.

One thing it could do is set up a transparent pharmacy benefit manager (PBM) to negotiate with the pharmaceutical companies. If Amazon were to go that route, though, Kraus doesn't believe that happen for around 10 years, so he believes that any effect that Amazon would have on drug prices wouldn't be felt for a while. 

Competitors beware!

Finally, there's one more group that will be rocked by this: the numerous other companies currently operating in the pharma delivery space right now. The effect is most likely to be negative. 

There's PillPack, an online pharmacy that has raised over $117 million; Zipdrug, which promises to deliver prescriptions in under an hour, and has raised $2.6 million; ScriptDash, which has raised $6 million; and Nurx, an on-demand birth control delivery company that prescribes contraceptives through its app, which has raised $5.42 million.

Kraus believes that Amazon expanding into this new space would have a devastating effect on these smaller companies. 

"Amazon has been very aggressive in other industries. They have a tremendous amount of cash, power and strength. They're aggressive when it comes to pricing, and for an entrepreneur or investor in one of those companies, it will be similar to Uber and Lyft. There will be pricing wars and when you get into a pricing battle with a more well armed competitor, it's losing battle for you," said Kraus.

The best hope, he said, is for the other companies to be acquired by Amazon. 

Not everyone agrees with that, though. Adam Levy, CEO of PopRx, a Canadian mobile pharmacy application, believes that Amazon's move would be beneficial to his company and to the space in general.

Amazon entering the the pharmaceutical space "would be wonderful," he told me. Rather than looking at the company has a potential competitor, Levy sees Amazon's move a validation of his company's core philosophy.

"If Amazon joined our market, it would be great competition for us and validate that what we have been saying for years: that people don't go to Shoppers Drug Mart or big chains because they love the service. They go for the convenience. Our approach is to destroy them on convenience by offering relationships and personalized service through mobile and online technology," he said.

"I think we can all learn from Amazon in this space and if they wanted to work with us on this, it would be a great opportunity to show the incumbents how to do it better really."

"We’re a company driven by our mission to improve patient care, and we hope Amazon can contribute to this mission too. One area where Amazon can really help our industry is increasing drug price transparency," Mattieu Gamache-Asselin, Co-founder and CEO at ScriptDash, told me.

"It’s a hot topic issue at the moment, and they are well positioned to impact today’s opaque system. It’s a >$400B industry today, and there’s a lot of room for innovative companies to make their mark. We’re excited to see what comes next from Amazon."

The future of health tech

Ultimately, what this news really might mean is that the big tech companies are finally ready to take the plunge into the digital health space.

Many companies have dabbled over the years. Many of Google's so-called "moonshot projects," for example, have had to do with health and well being. That includes a smart contact lens for monitoring diabetes, as well as something called Baseline Study, which will involve the collecting of genetic and molecular information from a group of people.

It also bought Lift Labs, the creators of an electronic device that improves the quality of life for those with Parkinson’s and essential tremor, in September of last year. 

The company's biggest, and most ambitious, health-related project is Calico, company that was founded by Google just about a year ago, and whose was to take on the aging process. The focus was said to be on health and well-being, particularly when it comes to aging and diseases associated with that process.

Apple has launched some health initiatives, including its Health app, as well as CareKit, an open-source software development framework for medical-care app. Apple has also been talking to the FDA for years about developing medical devices, including an app that would help diagnose Parkinson’s disease. 

One surprising entry into health has been Uber, which recently hired an outreach team to work with healthcare providers. The company has implemented two pilot programs, including one with Circulation, to help non-emergency medical patients get to their appointments on time, and UberCentral, a service to get patients to and from hospital appointments.

However, none of these companies have made health a top priority. At least not yet. 

In 2016, there was $4.2 billion put into digital health companies, in 296 deals. If companies like Google, Apple, Facebook and Uber were to get serious, Kraus believes that would drive the space further up. 

"There's been a lot of money poured into digital health, but there haven't been a tremendous amount of exits. It's still early days, and the tipping point will come when the big guys, like Amazon, Google and Facebook decide they want to get in. They have tremendous resources to spend, and they will increase the amount of M&A in healthtech," he said. 

"Those tech companies have had dibbles and dabbles, and dipped their toe in water, but have never made a big play in healthtech."

VatorNews reached out to Amazon for comment, but the company could not be reached at this time. 

(Image source: thesleuthjournal.com)

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