Amazon Threat Looms as Walgreens Surveys Health-Care Landscape

(Bloomberg) -- The remaking of the U.S. health-care industry is gaining speed, and some of the industry’s biggest players are racing to make sure they aren’t left behind.

No link in the long chain connecting drugmakers, distributors and insurers to doctors and patients has been untouched by an increasingly vigorous shakeout created by the threat of new competition from Internet giant Amazon.com Inc. and a shifting regulatory landscape.

In the latest sign that companies don’t want to be left in the cold, the Wall Street Journal reported on Monday that giant drugstore retailer Walgreens Boots Alliance Inc. was in talks to take over AmerisourceBergen Corp., one of the three largest drug distributors in the U.S. Walgreens already owns 26 percent of the company.

Distributors like AmerisourceBergen are an often-unseen but critical part of the apparatus that gets medication into the hands of patients. In acquiring it, Walgreens could gain more control over drug prices at a time when rising costs are splintering relationships across the health business -- and are in ever-greater focus in Washington.

The discussions between Walgreens and AmerisourceBergen are at an early stage and may not ultimately lead to a deal, the paper said, citing people it didn’t identify.

Amazon Lurking

Looming large over the deal talks is the prospect of Amazon entering the health-supply business. Fears about such a move have gripped investors and executives for months, and have helped spur dealmaking and other defensive maneuvers by health-care companies.

Amazon acquired licenses in more than a dozen states that would allow it to distribute and sell health-care goods as a wholesaler, Bloomberg reported in October. On Tuesday, the Wall Street Journal reported that the Internet giant had met with hospitals about potentially becoming customers of its business-to-business arm, which aims to bring the same logistical convenience to workplaces that it has to consumers.

“The Amazon bogey finally seems to be finally spreading its wings to medical supplies,” wrote Vijay Kumar, an analyst with Evercore ISI. He said the company could be a “formidable player” when it comes to selling basic hospital staples like gloves, catheters, drapes and other products.

And while the threat to retail pharmacies from Amazon is generally viewed as less imminent, it has nonetheless played a part in driving other companies into each other’s arms.

Walgreens rival CVS Health Corp. agreed last year to pay $68 billion to acquire the health insurer Aetna Inc. after both considered deals for other companies. That tie-up is expected to shorten the links between payers, patients and care providers, making it easier for Aetna policy holders to get prescriptions and visit clinics in CVS stores. 

CVS already has a vast pharmacy-benefit management division, and acquiring Aetna will give it yet another degree of remove from its retailing roots, which have been challenged as consumers buy more and more drugstore staples online from sites including Amazon.

Walgreens also has a large drugstore business; it recently agreed to buy nearly 2,000 Rite Aid Corp. stores for $4.38 billion after a larger deal was shot down by antitrust regulators. But unlike CVS, Walgreens doesn’t have a sizable pharmacy-benefits management division to insulate it from the brick-and-mortar retail industry’s turbulence.

Broken Chain

Inefficiencies in the supply chain are an increasing focus of critics of high pharmaceutical prices. President Donald Trump’s fiscal 2019 budget, released this week, wants to reduce consumers’ out-of-pocket health costs, mostly by targeting insurers and pharmacy-benefit managers.

Walgreens Chief Executive Officer Stefano Pessina has said he wants to lessen the number of moving parts in the drug business. Speaking last month at the J.P. Morgan Healthcare Conference in San Francisco, he said so-called vertical deals between different players in the drug supply chain could help simplify the health-care system.

“It could make the very complicated U.S. system more efficient,” Pessina said.

According to the Wall Street Journal, representatives of Pessina made a high-level outreach several weeks ago to representatives for AmerisourceBergen CEO Steven Collis. Walgreens’ large investment in AmerisourceBergen has strengthened the already close ties between the drugstore chain and one of its main suppliers.

Going It Alone

Investor reaction early Tuesday showed the risk of not having a partner. AmerisourceBergen shares logged the biggest one-day gain in nearly 18 years on Tuesday, rising as much as 14 percent in New York.

But Cardinal Health Inc. and McKesson Corp. -- rivals that also sell basic staples to hospitals -- were down 3.6 percent and 1.8 percent, respectively.

Drug distributors have been involved in litigation over their alleged role in worsening the U.S. opioid epidemic. AmerisourceBergen and rival pharmaceutical distributors, as well as several drugmakers, have been sued by state and local governments who claim that they helped create a public-health crisis by failing to control the flow of addictive painkillers to pharmacies. 

The distributors have said they recognize the epidemic is a crisis that requires urgent action and support effort to limit prescribing.

If Walgreens and AmerisourceBergen do reach an agreement, it would be one of the largest-ever deals for Walgreens. AmerisourceBergen has a market value of roughly $21.7 billion.

©2018 Bloomberg L.P.