Amazon (AMZN) thrashed the brick-and-mortar retail model with its e-commerce business. It put fellow tech titans to shame when its third-party web hosting unit set the standard for a new cloud computing model. Now it’s taking on the nearly $4 trillion health care market, which could keep Amazon stock growing for years — if it succeeds.
Amazon fired a big shot across the bow of drugstores and prescription drug wholesalers on Nov. 17 when it launched Amazon Pharmacy. The new unit will offer Amazon Prime members discounts of up to 80% on generic drugs and 40% on brand medications.
Shares of drug distributors and drugstore chains sank on the news, and recent IPO stock GoodRx (GDRX), a discount prescription drug shopping app, tumbled 22% in one day. Amazon stock ended the day up fractionally, on a down day for the overall stock market.
Amazon Pharmacy is just one of many moves the company has made in health care. It has partnered with health care providers to use the Amazon cloud platform to achieve more efficiency. The company disrupted prescription drug providers by acquiring online pharmacy PillPack. It established its own health clinic for employees. And Amazon expanded its delivery services to include medical supplies and equipment.
Amazon has been tight-lipped on long-term goals. The company declined to be interviewed for this story.
But now, as it collects more revenue of all types due to the Covid-19 pandemic, Amazon faces a health care industry that’s primed for disruption once the coronavirus passes. Patients are weary of skyrocketing health care costs, while insurers balk at shelling out countless dollars for treatments.
Potential Engine For Amazon Stock Price
If Amazon can deliver cheaper or more efficient services, the potential is enormous for fueling its growth engine — and by extension Amazon stock. Health care now comprises nearly a fifth of the U.S. economy.
“Amazon is indeed investing heavily in health care, and they will be a game-changer,” said Devin Soelberg, vice president of business development at Redox, which builds software that health care organizations use to modernize patient care and collaboration.
Soelberg’s belief that Amazon will be a game-changer comes down to one major trend. Consumers are sick of the high cost of health care and the lack of choices. And they are taking matters into their own hands.
Amazon has made many forays into the health care field over several years, some of them celebrated and some of them unannounced. The big unknown is just how far and deep the company will venture into the health care market and how much fuel that will bring to Amazon stock.
Investors who have watched Amazon stock soar more than 900% since the start of 2015 know competitors have their work cut out for them. The Amazon Pharmacy news sent shares of CVS Health (CVS), Rite Aid (RAD) and Walgreens Boots Alliance (WBA) tumbling. CVS stock dropped 8.6%, Rite Aid plunged 16.3% and Walgreens sank 9.6%.
Drug distributors AmerisourceBergen (ABC), Cardinal Health (CAH) and McKesson (MCK) also retreated. AmerisourceBergen fell 3.8%, Cardinal Health lost 6.5% and McKesson slid 5.6%.
Impact Of PillPack Acquisition
It was familiar ground for all involved. Amazon’s last major health care move was its acquisition of PillPack in mid-2018. Amazon paid about $753 million for the online pharmacy, which delivers prescriptions presorted by the dose. All the meds that need to be taken at a certain time on a certain day come in one packet. Nearly all the same retailers and distributors took a hit when that happened. Meanwhile, Amazon stock climbed 2.5% after it announced its PillPack acquisition.
The PillPack acquisition followed the January 2018 news that Amazon was joining with Berkshire Hathaway (BKRB) and JPMorgan Chase (JPM) to form a new partnership to tame medical costs. The partnership, called Haven Healthcare, aims to lower health care costs for their employees, without compromising quality, by developing new ways to apply data and technology.
While consumers are weary, Amazon can bank on the fact that health care remains a market rife with opportunity, thanks to decades of unrestrained spending. The Centers for Medicare and Medicaid Services says U.S. health expenditures multiplied more than 62 times in the 50 years from 1968 to 2018, the last year for which CMS offers such figures. Spending skyrocketed to $3.65 trillion from $58.4 billion in that time. By 2028, CMS sees national health spending jumping to nearly $6.2 trillion.
Amazon Care Clinic For Employees
The numerous moves Amazon has made include a pilot program called Amazon Care in Seattle. The health clinic serves employees and their families and could be a blueprint of what’s ahead.
Amazon Care services typically start with a video chat with health professionals to assess a person’s symptoms and health needs. The patient also can visit a clinic for in-person care. Services might include a Covid-19 test, a vaccine or treatments for minor injuries. Amazon Care launched one year ago, with PillPack services integrated into the plan.
Other large companies, like Apple (AAPL), offer their own health care services as part of an employee compensation and benefits package. The difference is that Amazon Care is much more external-facing, with a brand identity and presentation that strongly suggests the company is thinking about more than its own workforce when it comes to future potential markets.
Expanding Cloud Computing
Amazon also has developed cloud-based software platforms for health care providers using its Amazon Web Services business.
Amazon has created other health care services on its own.
In December 2019, the company announced Amazon Transcribe Medical. The service uses artificial intelligence and machine learning to accurately transcribe complex medical terms. Often, physicians must dictate medical notes into recorders and then submit those voice files to third-party manual transcription services.
On other fronts, Amazon is grooming its Echo line of voice-activated smart speakers to function like an in-home medical assistant. One Amazon patent for its virtual voice assistant, Alexa, aims to detect when a user is sick. The device would then help sell the user medications.
In August, Amazon introduced a diagnostic wrist band to monitor health and wellness, called Halo. The wrist band tracks physical activity and sleep patterns and measures body fat composition. Halo also has an accelerometer, a temperature sensor and a heart rate monitor.
Generic Medications From Amazon Basic Care
Amazon also has an e-commerce page called Basic Care that sells generic versions of over-the-counter medications. These include painkillers, cold and cough medicines, sleep medication and nicotine gum. The products lack branded names from well-known companies such as Johnson & Johnson (JNJ). But they all carry the label “Basic Care.”
Industry experts say one big problem in fixing the U.S. health care system has to do with how patient data is managed. Each major health organization differs in how it structures and stores its data, which hinders innovation. It would be as if every bank branch had its own, proprietary ATM card and its own dedicated website.
“The health care industry has that problem times 1,000,” Soelberg said.
Combined with the highly regulated nature of health care, the data exchange problem creates a fortress that makes it difficult to break through walls with innovative solutions that could lower costs and better meet consumer needs.
Amazon Stock And Fixing A Broken Health Care System
While the U.S. leads the world in medical research and biotech breakthroughs, it also has the world’s costliest health care system, representing nearly 18% of GDP. But change is coming, says Andrew Waldeck, senior partner at consultancy Innosight, where he leads the health care practice.
“While health care has historically been immune to the forces of disruptive innovation, it now appears more and more imminent,” Waldeck said. “Employers and consumers can’t handle more health care increases in premiums.”
Waldeck says consumer expectations and attitudes toward health care have changed. And Covid 19 reinforced the belief that inequities are substantial.
“Amazon has an attractive opportunity to disrupt,” he said.
Success in upending the health care market would be just one of many disruptions that has pushed Amazon stock ever higher. Amazon stock is up about 64% this year alone.
Health Care Disruptors Mount
But Amazon is not the only company looking to disrupt the health care industry. Walmart (WMT), Microsoft (MSFT), Alphabet (GOOGL), IBM (IBM) and others have taken a crack at it, with Walmart being the most aggressive.
They’ve had varying degrees of success and failure. Microsoft has its Cloud for Healthcare platform, designed to help health care providers improve their outcomes. IBM also has designed cloud solutions specifically for health care providers.
The combined activities of all these companies have helped to put the disruption in gear.
“They are shifting the basics of competition,” Waldeck said.
Another notable event that demonstrates the evolution of health care is the spread of telehealth during the Covid-19 pandemic. Telehealth uses digital information and communication technologies, such as computers and mobile devices, to give patients remote access to health care services, including doctor visits.
Performance Of Recent Health Care IPOs
One telehealth company that recently held an initial public offering was Amwell (AMWL). It raised $742 million, as shares jumped 42% on its first day of trading.
Another recent health care IPO came from GoodRx, whose discounted prescription shopping site serves close to 5 million consumers each month. It raised $772 million. GoodRx stock jumped 53% the first day.
But Amazon probably has the best shot at moving the needle. That’s because of its global, personalized connection to consumers, its high-speed delivery of packages, its powerful cloud computing unit and the wide variety of medical equipment on its e-commerce platform.
“Everyone in health care is scared of Amazon, and rightly so,” said David Williams, president at Health Business Group, a health care consultant. “Amazon is coming at it from all directions and they have the technology, scale and consumer focus needed to succeed.”
Sustaining Amazon Stock Growth
Amazon stock analyst Tom Forte of D.A. Davidson agrees that “the opportunity for Amazon in health care is very large.” He added: “And to the extent it succeeds, (health care) could meaningfully continue to sustain the growth rate of Amazon stock for years to come.”
Forte says Amazon’s strategy has always been to fail fast. If the company enters a market and isn’t happy with the result, it quickly drops the initiative.
Forte believes Amazon would back out of a health care venture that was not progressing rather than throw cash at a failing project.
“I’m less concerned Amazon would burn lots of capital chasing health care,” he said.
Amazon Delivers Medical Supplies, Equipment
One area where Amazon is having a big impact is in the delivery of medical supplies and equipment. Amazon sells a vast variety of medical equipment and supplies, using different webpages that target both consumers and businesses. Listings include equipment for hospitals, dentists, alternative care and in-home health care.
Amazon kicked the business into high gear in 2017 and quickly shook up medical players. After Amazon entered the fray, Cardinal Health, a drug and medical equipment supplier, acquired a medical supplies unit of Medtronic (MDT) for $6.1 billion. Medical equipment supplier Becton Dickinson (BDX) acquired medical technologies manufacturer C.R. Bard (BCR) for $24 billion. Both deals were reached in 2017.
Spurring Health Care Mergers And Acquisitions
Amazon’s various moves into health care over the past several years spurred other mergers and acquisitions, experts say.
Last month, health insurance giant UnitedHealth Group (UNH) paid a reported $300 million to acquire DivvyDose, a competitor to PillPack.
In 2018, CVS paid $69 billion to acquire health insurer Aetna. The plan is to use the nearly 10,000 CVS pharmacy locations in the U.S. to provide consumers with more local care options.
“All these companies will have to figure out how they stay alive,” Williams said.
Amazon has been a top-performing stock for many years. The IBD Stock Checkup tool shows that Amazon stock has a hearty IBD Composite Rating of 97 out of a possible 99. The rating means Amazon stock currently outperforms 97% of all stocks in terms of the most important fundamental and technical stock-picking criteria.
On Friday, Amazon stock closed at 3,099.40. Its record high is 3,552.25 reached on Sept. 2.
Amazon stock is currently not a buy, but keep an eye on it. Amazon stock has formed a cup with handle with a buy point of 3,496.34.
To find other good stocks to buy or watch, check out IBD Stock Lists and other IBD research.
Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
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