"Alexa, This Is Going To Hurt": These Companies Will Be Destroyed By Amazon Next

From Morgan Stanley overnight:


The reason the S&P healthcare sector is lower on the day...

... with distribution names getting hammered, is because in a report published overnight, Morgan Stanley analysts predicted that the sector, and severeal specific names, are most in danger of being targets of Amazon's unstoppable monopoly juggernaut, soon to be scheduled for Bezosian eradication.

As MS explains, it has identified "attractive subsectors and profit pools that Amazon could drain to fund disruption." MS assumes a 5% hit to prices when Amazon enters a sector, estimate the EPS impact on healthcare companies, and look at what the stocks are pricing in after the recent sell-off.

Healthcare distribution, encompassing medical, dental and drug distributors, drug retailers, and pharmacy benefit managers (PBMs), has the best fit with the Amazon playbook. Amazon’s expertise in logistics and B2B positions it to distribute commoditized products (supplies) to consumers/purchasers (e.g., hospitals, dental offices) potentially to be bundled with Amazon Web Services (AWS). They already target Medical Supplies distribution within Amazon Business, posing approximately 20% of earnings risk from more competitive price dynamics for select stocks.


Three strategic reasons for Amazon to enter retail pharmacy, using Whole Foods as a launch pad: to (1) drive Prime subscriptions via 55+ pharmacy customers, (2) improve returns on its Whole Foods investment, and (3) expand Prime Now. With the highest profits and lowest barriers to entry, retail plays to AMZN strengths. Price transparency and lower copays could reduce profits by ~10%, and lead companies to rethink strategies to stay competitive, as we have already begun to see with the rumored CVS/AET deal. While some investors believe Amazon will partner with or acquire a PBM, we are skeptical given such move would limit market opportunity.

The chart below shows the helthcare segments most at risk of "disruption", or market share loss to Amazon market, versus the gross profit opportunity for Amazon.

The bank gives the following explanation:

The market has been inundated with mixed headlines attempting to decipher Amazon's healthcare plans. Overlaying sectors' gross profit pools – a focus of Amazon's strategy – onto their risk scores, Retail Pharmacy emerges as a field of opportunity that we explore in depth. We are mindful of Jeff Bezos's strategic view that “your margin is my opportunity.” He will enter a profitable business and run it close to break even, reinvesting dollars back into the product/service they are building/launching to become a truly disruptive force within the ecosystem. ( Exhibit 1 ) Nevertheless, Amazon has been tight lipped about its intentions and we cannot predict their timing, though we ultimately think they will go down this path.

As Bloomberg adds, "the S&P Healthcare Distributors index is holding at a critical support level; should Amazon enter the business, the industry’s shares could be under both technical and fundamental pressure. Other sub-sectors are also under pressure, including services and facilities such as hospitals."  Of all names, Cardinal Health (see below) is leading the decliners even though there’s widespread debate about whether Amazon would try to tackle the drug distribution business.

Digging down into the subsectors, MS sees the following industries as most at risk from Amazon "disruption":

The details:

Medical supply and Life Sciences distribution are less rich targets but look like low-hanging fruit for Amazon's B2B and logistics strengths on basic goods. Cardinal with 10%-12% of profits geared to selling commoditized medical supplies is most at risk. We estimate a hypothetical 5% price cut across its book could lower profits by 22% due to the deleveraging effect. For McKesson, a 5% price cut toward the applicable portion of its medical-surgical business could lower profits by 9%. Our base case valuation assumes only a 3% cut in calendar 2019. AmerisourceBergen doesn't distribute medical supplies and remains immune in the near-term. Over the longer-term, if Amazon were to disrupt drug pricing within the drug supply chain, we estimate it could have a 4%-5% impact on the distributors' earnings.


Drug retailers have the most opportunities to adjust their business models and lower cost structures to defend against Amazon. Within the drug supply chain, the threat of Amazon’s entry into drug retail is accelerating vertical integration, and is cited as a driver behind the rumored CVS/Aetna merger. In our view, the combination would diversify profits away from the supply chain, help create a narrow preferred network, and act as a first step in repurposing the retail footprint to create a new healthcare-retail delivery model. If drug retailers don't change  this model, we estimate ~10% risk to profits. CVS has also announced free same-day delivery in New York City, proactively preparing for a potential Prime Now entry, in our view.


The PBM and Manufacturing models in near-to-medium-term seem most resilient; however, longer-term cracks could weigh on the 20-30% of PBM operating profits tied to rebates. Meanwhile, hurdles in manufacturing are high, but may offer pockets of private label opportunity in the most commoditized products. Specialty Drugs appear well insulated.

Finally, MS' detailed breakdown identifies several names, as well as sector backdrops and other inputs all driven by Amazon's implied strategy, that now influence corporate valuation. 

Amazon's entry into healthcare will likely take time  (building out grocery was a 10 year endeavor) and we fully acknowledge that sub-sectors with solid fundamentals, that can deliver earnings power and growth, can outperform even with the Amazon threat in the background. This phenomenon occurred in food delivery after Amazon announced its entrance into New York. Grubhub (GRUB) dropped 12%, losing ~$250 million in market cap on the initial news, but quickly recovered those losses over the next two weeks. That said, with limited organic growth levers, we see more risk to select healthcare sub-sectors.


Endgame Napoleon YUNOSELL Mon, 11/20/2017 - 13:37 Permalink

Many [most] of the frequently absentee mom-gang employees of their competitors will not respond to your complaint email, either, nor will they call or email prospects all day long to generate enough new business sales to compete with the Amazon behemoth.

And the people who do will be employed for awhile and even praised over-lavishly for their hard work and high productivity to squeeze a maximum number of sales out of them to pump up the babyvacationing manager’s bonus. Then they will be bullied out the door over the flimsiest of petty-cubed trivialities, particularly if they are not in the absenteeism gang.

Non-churned, family-friendly employees do need to do the following when working for one of the many parent-gang protection rackets called workplaces that are competing with the online big boxes:

1) leave work at 2:30 pm every day for kids, supposedly, in addition to taking many days and weeks of excused time off beyond PTO and multiple pregnancy leaves for things like baby travel soccer, alternating lengthy absenteeism jaunts with their family-friendly managers in the back-watching, crony-parent, hiring/retention cliques called “work”places;

2) participate with maximum enthusiasm in the following often kid-themed workplace activities: Halloween dress-up day, baby-mommy-look-alike-bulletin-board-decorating contest, adult cubicle Easter egg hunt with candy prizes, spin-the-wheel contest, parking lot luncheon with toss-the-beanbag game, movie day and Family Day picnic;

3) post a lot of baby & kid pics, celebrating your “working family” online, so much so that every time co-workers pass your cubicle it is lit up with a visual celebration of your family life, rather than visual evidence of hard work on behalf of paying customers to 1] retain accounts or 2] generate a volume of new accounts via the dogged work that is required.

In reply to by YUNOSELL

SilverDOG Mon, 11/20/2017 - 13:04 Permalink

Amazon is the Enemy.Or again... and again... those who are behind, what you are allowed to see.Nervous hilarity laughs and "Oh shit" is all I hear. 

AgAuSkeptic Mon, 11/20/2017 - 13:06 Permalink

There will not be a disruption. Most of the price you see on a drug are based on its perceived effectiveness, whether the disease it treats is a cold or cancer, the logistics cost (shipping, transport etc. ) are miniscule. Here is the rating and price of Asthama medications, note the crazy variation in price (dependent on perceived effectiveness acieved through clever marketing) https://www.rxrankings.com/datatable/default/diseaseinfo/Wheezing@(Asthma)

Anonymous IX Mon, 11/20/2017 - 13:07 Permalink

Dear Amazon:  I'm a prime member.  Can you get some Medicare insurance which allows me to pay my alternative medical personnel (herbalist, massage therapist, Far-Infared treatments, etc.) instead of insurance only applicable for standard, inefficient medical care?  

hound dog vigilante Anonymous IX Mon, 11/20/2017 - 13:21 Permalink

 in 20 years, Prime = MediCare.Amazon is doing to downsizing & automation work that .gov SHOULD be doing for themselves, but won't.  Soon enough, .gov. will contract & pay Amazon to deliver .gov services, incl. healthcare..gov will be 'privatized', but not in the way that we might expect.  As the private Fed serves the private globalist banks, Amazon will someday "serve" .gov.

In reply to by Anonymous IX

Dontblamethegoat hound dog vigilante Mon, 11/20/2017 - 14:20 Permalink

Uhh ... what % of healthcare cost is medication delivery versus professional services from a fixed building?We go to see physicians/surgeons and their support staff.We go to get blood drawn, etc.Of course a lot of the consultations can be done via multimedia internet sessions, but there is an irreducible set of things that simply cannot be done remotely.Trauma surgery after a car crash and cardiac surgery come to mind.  Anything requriring a sterile field, really, like birthing babies or brain surgery.I don't see Prime replacing any of those things ...   

In reply to by hound dog vigilante

Vilfredo Pareto Mon, 11/20/2017 - 13:13 Permalink

I work in healthcare.  I wouldn't mind amazon and Walmart and google burning it to the ground and taking no prisoners. It is totally fubared by government and insurors with the parasite s adept at regulatory exploitation holding us all hostage If amazon/Google/Walmart  would automate some of this stuff and not charge $20,000 per physician for what are basically encrypted communication and file sorting programs I would welcome it. They can kill off pharmacies and insurors too if they want.  I applaud.

chunga Vilfredo Pareto Mon, 11/20/2017 - 13:42 Permalink

SHort/true strory...last week I picked somebody up at the hospital and brought them home. She left with an RX and I figured I'd stop at Kroger's and get it for her and pick up a few staples for her while it was being filled. I explained to the pharmacist that she was in my truck not feeling well and explained my plan. The prescription was for one med, a total of 6 pills.He refused to tell me how long it would take and I told him if it was too long I'd take it across the street to another pharmacy. He literally threw the dr. prescribtion at me and told me to take it somewhere else. I did, and they had for me in 15 minutes.When I got home I called the local store manager and told him they just lost between 600 and 800 dollars a month in groceries/gas. I also waited on hold for 25 minutes with their coporate "ambassador" number and explained the same. I also told them both that I was sure they did not care and I hoped that AMZN would buy their company and fire them all.I go out of my way to do business with these companies and many times the service sucks so bad I'd rather just click and have it delivered cheaper. You're not getting my money if you treat me like shit.

In reply to by Vilfredo Pareto

Hubbs Vilfredo Pareto Mon, 11/20/2017 - 14:35 Permalink

The only problem is that like most revolutions seeking to overthrow a corrupt government, the replacement is as bad or worse.Google, WalMart, Amazon, big pharma, corporate medicine, big health insurance, ACA , the government, Deep State etc are NOT looking out for your (the public's) interests. They are positioning themselves for the day when they will  fight amongst themselves over our financially depleted dead carcasses. 

In reply to by Vilfredo Pareto

besnook Mon, 11/20/2017 - 13:38 Permalink

amazon prices are high. i can usually get the item cheaper and with much quicker delivery and better customer service(even with prime membership) from other vendors especially ebay.