Amazon’s Potential Pharmacy Acquisitions: Insights and Analysis

Amazon is slowly yet surely expanding its retail footprint, and one of the critical sectors it could potentially get into is the pharmacy business. The opportunity to enter this lucrative market could be compelling for the tech giant. However, Amazon must carefully consider the landscape and potential acquisitions. In this article, we explore the various possibilities and provide insights into which pharmacy companies Amazon might target.

Strengthening the Retail Footprint with Whole Foods or Rite Aid

Considering that Amazon already owns Whole Foods, the company could leverage its existing brick and mortar stores to integrate pharmacy services. Whole Foods currently has a significant presence, which could serve as a strategic entry point. Alternatively, Amazon might consider purchasing the leftover Rite Aid stores that Walgreens did not buy. Rite Aid's remaining locations would offer a prime opportunity for Amazon to expand its retail network without engaging in a costly direct purchase from Walgreens or CVS Health Corporation.

The Lucrative Pharmacy Market for Amazon

The pharmacy market is a significant opportunity for Amazon, with an estimated revenue of $297 billion and a CAGR of 3.6%. Major players in the U.S., such as CVS Health Corporation and Walgreens Boots Alliance, dominate the industry. However, for Amazon, the potential acquisition could be a costly endeavor. A recent report by IBISWorld projects an impressive market size, suggesting that acquiring a prominent player could be an expensive deal.

CVS Health Corporation

CVS Health Corporation is one of the leading players in the U.S. pharmacy market with a market capitalization of $79.6 billion. Their operations span 9,700 pharmacies across the country, and they employ over 24,000 pharmacists. In 2016, CVS reported net revenues of $177.5 billion with a free cash flow of $8.1 billion. For Q1 2017, they generated $44.5 billion in net revenue, with a free cash flow of $3.1 billion. Despite a reasonable debt of 25.94% of its enterprise value, a direct acquisition could still be a significant financial commitment.

Walgreens Boots Alliance Inc.

Walgreens Boots Alliance Inc. has a market capitalization of $84.111 billion and operates 8,232 locations in the U.S. They employ approximately 10,578 pharmacists. In Q2 2017, the company reported GAAP net earnings of $1.1 billion, with a 14% YoY decline in sales to $29.4 billion. Free cash flow was reported at $2.6 billion, an increase of $560 million compared to the previous year. Walgreens and Rite Aid are currently working on a possible merger, as approved by the FTC.

Rite Aid Corporation

Rite Aid Corporation has a market capitalization of $3.4 billion and operates 4,500 pharmacies in the U.S. The company's residual value could be an attractive target for Amazon, especially since the FTC has already approved a possible merger with Walgreens. If the merger is successful, Walgreens will control over 12,700 locations. Additionally, the acquisition or purchase of Rite Aid stores would avoid trading a combined $10 billion in value.

Mail Order Model with Express Scripts

An alternative model for Amazon to consider is the mail order pharmacy service, similar to Express Scripts. By acquiring a pharmacy benefits manager (PBM), Amazon can leverage its existing delivery systems to send completed prescriptions to clients. This approach could provide a more cost-effective solution and avoid the high upfront costs associated with traditional brick-and-mortar pharmacies.

Conclusion

While Amazon has several options for entering the pharmacy market, each comes with its own set of challenges and financial implications. Leveraging Whole Foods stores or acquiring the leftover Rite Aid locations could be a strategic move for the tech giant. Alternatively, a mail order model with a PBM like Express Scripts could provide a more efficient and cost-effective approach. Ultimately, the choice will depend on Amazon's long-term strategy and the financial feasibility of each option.