When Amazon.com muscles into a new market, the entrenched players often take a hit on Wall Street. And so it went Tuesday when the world’s largest online retailer announced it had started a web drugstore and would offer discounted meds to Prime subscribers. CVS Health shed about 8.6% and Walgreens Boots Alliance sank 9.6% as investors and analysts tried to figure out whether Amazon was set to disrupt another industry as it has done with books, logistics and cloud computing.

Amazon has worked hard to rid its digital shopping mall of the opaque pricing and powerful intermediaries that would appear to make the health care industry ripe for disruption. But for now Amazon Pharmacy, built atop the company’s two-year-old PillPack acquisition, strikes some leading analysts as a decidedly me-too effort that won’t immediately revolutionize the prescription-drug business.

For starters, Amazon isn’t using its size and clout to negotiate discounts on drugs. Rather, it’s outsourcing the job to Inside Rx, a unit of Cigna’s pharmacy-benefit manager Express Scripts — the very archetype of a traditional industry player. That means Amazon will tap into the existing infrastructure used to pay for prescription drugs rather than transforming the model, as some industry watchers had expected the company to do.

What’s more, state and federal regulations limit Amazon’s ability to make use of its existing logistics network. Amazon Pharmacy will use a dedicated set of warehouses — in Arizona, Florida, New Hampshire, New York and Texas — and ship goods to homes through a variety of carriers, a spokesperson said. In other words, customers shouldn’t expect their medicine to come in the same package as the printer cartridge and pack of socks they ordered. And investors shouldn’t expect Amazon to reap the logistical efficiencies of such a commingling.

When Amazon announced its pharmacy store Tuesday, Adam Fein, chief executive officer of the Drug Channels Institute and an expert on the prescription-drug supply chain, thought he was seeing something transformative. But as he dug into the details, Fein came to view the offering as less novel than it seemed.

“Perhaps one day they’ll become a true disrupter,” Fein said. “At this moment they’re choosing to join the drug channel, not fundamentally change it.”


None of this is to say that Amazon won’t prosper selling prescription drugs — or give its rivals heartburn.

The pandemic has prompted Americans to stampede online in record numbers. Meantime, many have grown accustomed to web consultations with doctors and arranging COVID-19 tests on a smartphone.

“These macro behavioral changes increase the likelihood that Amazon’s pharmacy product could gain traction,” Morgan Stanley analysts wrote in a note, adding that capturing these customers will require Amazon to offer competitive prices and selection.

Perhaps the most novel aspect of Amazon Pharmacy is its pledge to foster price transparency by letting shoppers know how much a drug costs through their insurer versus how much it costs if they buy it themselves. Many Americans assume that insurance companies get a better deal on drugs. That’s not always true, but the entrenched economics of the health care system are hard to dislodge. Walmart roiled the industry a decade ago by selling cheap generic drugs at a set price, growing the company’s business without upending the U.S. health care system.

The discounts offered to Prime members represent an opportunity to expand a loyalty program that has fueled Amazon’s rise. Older people are an especially tempting demographic. They’re the biggest buyers of prescription drugs and the least likely to be Prime members, analysts say. If Amazon can attract this cohort with discount meds and free delivery, these shoppers might be persuaded to pay $119 for an annual Prime subscription and start buying other stuff.

And because more than half of U.S. shoppers start their online product searches on the company’s websites, Amazon can advertise medications to millions already used to buying everything from toilet paper to clothes. Cowen, which regularly surveys Amazon shoppers, found that 57% of Prime households would consider letting Amazon handle their meds deliveries. Offering deals on prescription drugs could become yet another enticement — beyond free shipping, music and video streaming — to get Americans to sign up for Prime and keep existing subscribers loyal.


Amazon has stumbled entering new markets before, of course. Its acquisition of Whole Foods Market in 2017 seemed to herald its coming domination of the grocery industry. That hasn’t happened, in large part because most shoppers prefer to squeeze their produce and eyeball their steaks. While millions have tried online food shopping amid the pandemic, there is plenty of reason to believe many will return to physical supermarkets once the outbreak eventually subsides.

But prescription drugs are different. While drugstore chains say that their shoppers would rather have an in-person consultation with a pharmacist to learn about new medications, returning again and again for refills of drugs taken for chronic conditions is often a chore. Unlike a head of lettuce a shopper might want to see firsthand, pharmacies compete to sell the same, commoditized medications, which are used on a predictable schedule and often easy to ship.

For more than a decade Amazon CEO Jeff Bezos has told his lieutenants that new lines of business should address a massive potential market, seeking a scale that can expand with the fast-growing retailer. With the PillPack acquisition in 2018, he signaled that one of those markets would be the $4 trillion U.S. health care system. Other initiatives underway include clinics for employees at Amazon’s Seattle headquarters and efforts to sell cloud-computing services to the health care industry.

Amazon put PillPack co-founder TJ Parker in charge of the pharmacy division and gave responsibility for logistics to Nader Kabbani, a longtime Amazon executive who previously oversaw “last mile” delivery services like the Flex gig-economy delivery program. He also led teams working on Kindle, when the pioneering e-reader was a top priority for the company. PillPack will continue to operate its own site, an arrangement Amazon has used with prior acquisitions like footwear retailer Zappos.

Amazon often bides its time integrating newly acquired companies, and in this case it gave the drugstore chains about two years to prepare for this moment.

CVS bought a health insurer in 2018 to diversify its business. The company now boasts a pharmacy, an insurer and a pharmacy-benefits manager. It stocks more health items and even sells durable medical equipment and sleep-apnea machines at some stores. About 2,000 of its almost 10,000 stores will be remodeled to boast new services like diabetes management and other clinical offerings. Retail and long-term-care services represented 29% of CVS’ $256.78 billion in 2019 revenue.


By contrast, Walgreens has done less to construct a defensive moat — hewing closer to its roots, while experimenting with new concepts. Its stores are designated FedEx pickup and drop-off locations. Some are testing selling groceries from Kroger. Other locations are renting out space to Aspen Dental. At least 500 Walgreens stores will boast a VillageMD doctor’s office in the next five years. Retail pharmacy accounted for 76% of the company’s $139.54 billion in fiscal year 2020 revenue.

Both CVS and Walgreens accelerated their efforts to enable prescription delivery and pickup this year amid the pandemic. Walmart, meanwhile, introduced a curbside option and no-contact delivery at 4,000 of its stores in 30 states.

In a note Wednesday, Bloomberg Intelligence analysts Jonathan Palmer and Fallon Stephan wrote: “While Amazon’s brand and logistics are competitive, if not stronger, than the incumbents, we don’t expect a rapid uptake. Its pharmacy offering is undifferentiated — unlike, for instance, CVS which also owns a PBM and insurer — and its two-day delivery largely matches current services in the market.”