Why Indian pharma need to track Amazon's plans in health care

Amazon, it is often said, is unstoppable. Once known for the books it sold, the e-commerce behemoth has today permeated most lives with products to meet everyday needs - from grocery to gadgets, movies to now even medicines. Three recent announcements, two of them linked to Amazon's involvement with health care, have the potential to disrupt the pharmaceutical industry with long term implications for Indian pharmaceutical companies.

It is not happening just yet and could arguably take a while but if the recent news reports are anything to go by, the door has been cracked open and as one pharma leader said, "with Amazon, things can happen pretty rapidly."

The three news pointers were: 1, Amazon launching its own line for sale of over-the-counter (OTC) drugs for Perrigo, the Dublin-based pharmaceutical company. 2, Amazon, Berkshire Hathaway, and JPMorgan Chase & Co. announcing a partnership to address health care for their U.S. employees, "with the aim of improving employee satisfaction and reducing costs"; and 3, Not linked to Amazon, but important for the pharma industry - Warren Buffett's Berkshire Hathaway making an investment in Teva Pharmaceutical, the Israeli generic drug giant.

On the first point about the sale of OTC drugs (OTC drugs, very loosely, are those that do not need a doctor's prescription - things like vitamins, food supplements, common antidotes for cough and cold, some ointments and creams): At the moment, the development concerns Perrigo and the questions pharma companies may want to track is what it could do for the company. Will the volumes expand? Sure, it may grow as Perrigo gets one more platform for sale of its medicines. Right? But what many of them may want to watch is whether this will be high volume, low margins scenario. This is linked to the elements we do not know details about. For instance: What margin Amazon is seeking from Perrigo and what margins Perrigo currently gives to the distribution and retail channels. So, it may help to watch out for the OTC revenue margins that the company will report and how different it is from the conventional channels that it uses.

The second issue is going beyond Perrigo and this is hypothetical but potential to be real. What happens when it goes beyond Perrigo. Currently, most Indian companies supply only prescription medicines in the US market with the exception of Dr Reddy's and Aurobindo, which also sell OTC products. Though their product profile is little different from Perrigo. The good news for Indian pharma is that this opens up one more channel to sell medicines. That is some relief from a market scenario today in the US where there are only three large wholesalers and chains that source generic drugs as against about a dozen of them about five  years ago. And because of this consolidation, the direct impact was pressure on pricing as it became a buyer's market. How this will change with Amazon's entry is anybody's guess and going by the early impressions from some pharma companies, there are reasons to worry as Amazon could be a demanding customer so the pricing pressure may continue, if not increase even more.

But then, it is possible now that some of the benefits may get passed on to the end consumer or the patient buying the drugs. Also, we are still talking of OTC drugs and this question may arise if at all  Amazon opts to get into prescription drugs. But then, if that happens, it also raises questions around how Amazon will deal with the complex drug distribution channel in the US. There are for example the Health Maintenance Organisations (HMO), Pharmacy Benefit Managers (PBM), the large wholesalers and chains, and then the government.

The bottomline for Indian pharma is that clearly Amazon is looking at the high margin business in retail pharmacy and is trying to disrupt this and in this process could potentially change the ecosystem.

Analysts and vigilant pharma leaders are seeing early signs of it in, what they see as, the initial experiments of Amazon.     

The second point about Amazon, Berkshire Hathaway, and JPMorgan Chase & Co announcing a partnership to address healthcare for their U.S. employees, is being read as a signal to an attempt to remove the inefficiencies in the US healthcare system. Healthcare costs in the US are arguably very high and it is not just about the price of medicines but also the cost of hospitalization, which is quite high too. While, the current news is about a way to address this for their employees, analysts like to remind us that Berkshire is also involved with insurance business and therefore is a paying entity, in some sense. While this is limited to the employees at the moment, analysts therefore feel, it could well be a pilot for a new potential channel and therefore needs to be watched closely.

The third news component about Berkshire Hathaway's investment in Teva. While Teva is also into innovation play, it is still seen as a generic giant and therefore the reading for Indian pharma is clearly that generics has a future and apparently there could also be the business component in the belief  that perhaps whenever pricing of generics sees a turnaround, Teva would stand to gain the most. But more important could be signal that Berkshire sends out about its foray, in a sense, into the pharmaceutical business.

The upshot of it all for the Indian pharma companies is there is lot to watch out for and to be prepared for times when the pricing pressures will only increase.