The Amazon Factor

The Amazon Factor

There is a certain amount of irony that the companies which hold the keys to the future of healthcare won’t be presenting at JPM. This is not to say they won’t be in attendance as they will be out in full force but given their paranoia and quest for privacy they don’t want anyone to know it. Which when you stop and think about it is just a little wacky but what the heck as Momma Kliff used to say it is what it is.

Google, Apple, Facebook and all the high-tech cash rich companies will be hanging over this conference. However no other company will make its presence felt like Amazon. The fear of Amazon is what drove CVS to buy Aetna and Humana to buy a stake in Kindred. In fact, it is not an overstatement to say that almost any deal in the healthcare sector is being driven by the fear of Amazon. Amazon is not just turning the retail sector upside down, it’s turning the world upside down.

While many in the wacky world fear Amazon the reality is they should be embracing Amazon. See when it comes to drugs and medical devices which are regulated by the FDA Amazon has no interest making these things. This is not like a flat screen TV or laundry detergent; these drugs and devices bring with them an entirely different model and cost cannot be easily driven out of the process. Besides the complex, lengthy and costly FDA process, these products bring with they complexity of reimbursement. This is not, at least so far, what Amazon is all about.

Yes, we can make a strong case for Amazon becoming a global pharmacy and using their superior logistics and systems to deliver drugs and device supplies to a patient. However, these will be other companies’ drugs and device supplies. Amazon will not become a drug or device company, nor do we see them wanting to own one either. This is not like buying Whole Foods an acquisition that compliments their existing business model. Drugs and device supplies are important to Amazon from a platform perspective.

We hate to beat a dead horse especially since we like horses, but all the high cash rich companies are making the deep dive into the diabetes because they want to bind more consumers to their platform. And quite frankly Amazon is no different than Google or Apple in that perspective. The difference comes that Google and Apple like to build things while Amazon will only build something if they can drive cost out of the manufacturing process, cost savings which are then passed onto the consumer. Doing this with a medical device isn’t easy and doing it with drugs is next to impossible.

The cost savings in medical devices is achieved mainly through scale, as we keep saying the more of these things that are made the cheaper they can be made for. Scale is important with drugs too only scale is achieved mainly from gaining favorable formulary position. Patent protected drugs with favorable formulary position are extraordinarily profitable.

Where we see Amazon helping both drug and device companies is helping them with distribution. Listen we know we make fun of snarky Alexa but with current technologies Alexa knows when a patient needs more drugs or device supplies. Drugs and device supplies which can delivered right to the patient. All Amazon wants is a small piece of the pie which when applied to the huge number of patients with diabetes becomes a nice chunk of change.

Now just in case anyone thinks this has never been done before think again as Medtronic (NYSE: MDT) is doing this right now. The bread and butter of Medtronic’s business model is not making way cool whiz bang insulin pumps. No, their bread and butter come from the continual sale of pump supplies. Even better Medtronic controls the supply chain, they not only make the supplies they distribute them too. About the only item that the company does not sell or distribute is the insulin that used with the pump, something we see changing once biosimilar short-acting insulin gets here. As we have said Medtronic was at one time an ally of Lilly (NYSE: LLY) and Novo Nordisk (NYSE: NVO), an alliance which will end once a biosimilar gets here.

Therefore Lilly, Dexcom (NASDAQ: DXCM), Tandem (NASDAQ: TNDM), Novo and every other diabetes company should embrace Amazon and do whatever they can to partner with them. Let’s just take Dexcom by way of example. Dexcom is facing a fight with Abbott (NYSE: ABT) who has gone nuclear when pricing the Libre. With Amazon as a partner Dexcom could cut costs by making Amazon their partner. Amazon could sell and distribute the system with Dexcom supporting it. Dexcom drives costs lower, Amazon picks up a nice revenue stream and the patient is well served.

Think about how this model could work with a diabetes management system. Lilly supplies the drugs and devices but uses Amazon to distribute and refill. Alexa can be tied in not just to refill but to coach too.

We can understand why retailers fear Amazon, but we cannot understand why any drug or device company would. We could be dead wrong, but we just don’t believe Amazon wants to be in the drug and device business. The real problem as we see it is getting drug and device companies to think out of the box. To break from the past and embrace the change that is coming. Yes, it’s a different way of doing things but that different does not mean it’s not the right thing to try.