Daria Nipot
The Doctor Will See You Now
Amazon.com, Inc. (NASDAQ:AMZN) announced on Tuesday, January 24th, that it was rolling out the launch of new generic prescription drug service called RxPass. In this article, we’ll dive into why, unlike Amazon’s other forays into healthcare, this one could actually take root.
Amazon has wanted to break into the $4 trillion healthcare market for some time. In 2018, the company acquired PillPack, an online pharmacy that shipped medications to your door in daily, pre-packaged doses, for $1 billion. While the move was initially seen as the opening move in what would surely amount to Amazon’s dominance of the healthcare space, the reality is that the venture more or less fizzled.
In the same year, Amazon announced plans for a healthcare venture called Haven. This new operation, run along with unlikely healthcare partners Berkshire-Hathaway (BRK.A) and JPMorgan Chase (JPM), was meant to revolutionize more or less the entire healthcare ecosystem. According to the New York Times, the venture was meant to tackle:
“a wide range of health care solutions, as well as pilot, new ways to make primary care easier to access, insurance, benefit, simpler to understand, and easier to use, and prescription drugs more affordable.”
In 2021, Haven was quietly shuttered, as what was expected to change the medical landscape with a roar died out with a whimper.
If At First You Don’t Succeed
Given Amazon’s reputation as a relentless operator, it’s not surprising then that the company would continue to iterate on its plans to break into the healthcare market rather than scrap them.
Discount or cost-plus generic pharmaceutical operations have recently generated headlines, as Mark Cuban launched Cost Plus drugs with the aim of making prescription medication more affordable to those without healthcare or those simply wishing to pay less.
Amazon, given its ownership of PillPack, was doubtless watching these developments and fledgling business operations closely. It also gave leadership a chance to observe the popularity and viability of such an operation without having to commit capital resources to it.
RxPass has a simple premise. First, customers must be members of Amazon Prime. Then, for an additional $5 per month, customers can have prescriptions filled. There are currently more than 50 generic prescriptions on offer, ranging from depression and hair loss treatments to blood pressure and prostate health.
It’s unclear from initial information if the $5 per month is a flat fee regardless of the number of prescriptions, or if it is per prescription. While it would be much bigger deal certainly if it were $5 flat regardless of the number of prescriptions, we don’t believe that five dollars for each prescription would pose a material issue to the viability of the business.
The Opportunity
By the Numbers
The generic drug market in America is, to put it mildly, large. With sales in 2022 estimated to be $82 billion, the opportunity to leverage existing infrastructure in PillPack and its extensive logistics network has the possibility of moving the needle for Amazon.
For reference, the cost for Amazon Prime without RxPass is either $14.99 per month ($179.88 per year) or $139 if subscribers pay annually. Add on the $60 annual charge for RxPass and monthly subscribers will pay $239.88 per year, while annual subscribers would pay $199.
Prime is estimated to have a little over 200 million subscribers. Assume the company converts a base of 10% of those users who require generic prescriptions (assuming that the 10% includes new prime subscribers who join for RxPass).
If you’re wondering why we are assessing a 10% initial adoption rate, our assessment is driven by two main considerations:
- RxPass is currently available in 42 states. California and Texas are noticeably absent from the list. While we assume the company is working diligently to receive permission from the two most populous states in the country, it causes us to materially lower our initial adoption estimates.
- A Georgetown University study estimates that 131 million Americans utilize prescription drugs. Assuming a 12-month adoption of 10 million seems a reasonable target to us, especially with the current exclusion of Texas and California.
By this math, 10 million households over a 12-month period (10% of Prime users 7.5% of Americans utilizing prescription drugs), equates to a $600,000,000 bump in top-line revenue for Amazon. This is a more than 1% bump overall based on 2022 revenue estimates. (Which may not sound like a lot, but anytime analyst estimates are revised upward, stocks tend to respond.)
Elimination of Prime Sharing
Amazon shares a problem with Netflix (NFLX) that isn’t much talked about–Prime sharing. Like the ever-present problem of password-sharing among households at Netflix, Amazon has a problem with household sharing. To combat this, Amazon has established Amazon Household, which allows for sharing with up to two adults and four children, but the enforcement has been weak at best (this author knows from… um… personal experience).
Enrolling an adult in RxPass could help strong-arm Prime users into self-enforcement. If the primary registrants on an RxPass prescription do not match the Prime holder, Amazon could simply refuse to fill the order. Consequently, households finding ways around establishing multiple Prime accounts could see a true benefit in setting up individual Prime Household accounts.
In short, there is no compelling reason that Netflix can lever over users to stop password sharing; but by dangling massively cheaper prescription generics in front of customers, Amazon may have found a solution. Of course. there is virtually no way to numerate this thought, but it seems, on its face, to be a compelling reason for consumers to halt a behavior that has long reduced Amazon’s top-line.
We believe that if consumers exhibit this behavior–as we believe they would–that this would serve to magnify the expected (and conservative) 1% annual top-line bump.
Increasing Demand & Value Add
2022 was a big year for generic drugs. According to recent study:
- Prescription fills for Lexapro, an antidepressant, were up 70%.
- Generic Zoloft fills, another antidepressant, were up 31%.
- Trazodone fills, an anti-anxiety medication, were up 21%.
Generics for each of these–as well as generics for high blood pressure, cholesterol, hair-loss, Parkinson’s and restless leg syndrome, and diabetic kidney disease–are available with RxPass.
Consider Pramipexole–a generic used for symptoms of Parkinson’s disease. According to GoodRx.com at the time of this writing, the average cost to fill a Pramipexole prescription was $47.96.
Now, this isn’t a nice-to-have drug. People who need treatment for Parkinson’s symptoms really need it. And $47 per month is the average price they need to pay. That’s $564 per year. Imagine, now, that this same person can fill the same prescription and enjoy Prime access for $199 per year–you don’t need to believe in the mythical “rational consumer” to understand that people will flock to this.
The Bottom Line
We have previously written that cracks in the AWS infrastructure could spell near-term problems for Amazon. While we do not reverse that opinion, we believe that the launch of RxPass could create synergies within Amazon’s legacy business that:
- Boost Prime membership, and
- Give Amazon its long-awaited foothold in the $5 trillion healthcare market.
Lastly, while we are not making any concrete predictions given Amazon’s rocky healthcare track record, we believe that the innate appeal of $5 per month generics could create a runway for a second AWS-like healthcare business within Amazon. It is, to be sure, an exciting day for the company’s investors.
We eagerly await details from company leadership on Amazon’s upcoming earnings call and will be monitoring progress of RxPass closely.
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