MIZUHO SECURITIES USA INC. | US EQUITY RESEARCH
Summary
We would be buyers of CVS and WBA on today’s weakness related to a press report that AMZN is considering entering the pharmacy market. While we believe AMZN has the monetary resources to enter the space, we do not think AMZN’s entry would be market disruptive given: 1) mail order already exists; and 2) it is unlikely AMZN could garner generic discounts greater than CVS and WBA already offer. Given the regulatory, payer and generational hurdles, we do not think the investment AMZN would need to make would garner the meaningful ROIC it typically enjoys and expects.
Key Points
Hiring activity not surprising. According to the reports, AMZN decided to hire a GM to oversee the pharmacy effort, as well as other people from the pharmacy sector. This activity is not surprising to us if AMZN is serious about entering the pharmacy market given any entry would need to be organic (there is no obvious asset to buy) and any investment would be significant. This reminds us of when WBA built up an internal “distribution” team about 6-8 years ago but eventually shuttered the group once the company realized that the drug manufactures only wanted to deal with the drug distributors.
While we believe AMZN has the resources to enter the pharmacy market, we do not think AMZN’s entry would be market disruptive. Given: 1) mail order already exists; and 2) it is unlikely AMZN could garner generic discounts greater than CVS and WBA already offer. We also think AMZN would face major infrastructure, payer and regulatory hurdles and it would be a major process for AMZN. Even if AMZN decides to make the investment, we still only view AMZN as a long-term threat due to the generational gap and the fact seniors (who are the highest consumers of prescription drugs) want personal care from their local pharmacists.
Mail order already exists so AMZN entry would not be a game-changer for the industry. All major PBMs already offer home delivery, which is usually driven by plan design dictated by their employers. Mail order penetration has been flat to slightly down over the past five years. Interestingly, when CVS Caremark introduced Maintenance Choice, there was a trend out of mail back into retail because people like going to retail pharmacies to get their drugs.
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