Last Tuesday Amazon announced the launch of RxPass, a new prescription subscription, with the stated goal of helping “…Prime members who take multiple medications save time and money.” For $5 per month, RxPass offers unlimited access to generic drugs that treat 80 common conditions, including high blood pressure, anxiety, and acid reflux.
As I wrote in 2017 for Fortune, it was evident even back then that Amazon was seeking a position in the high value pharmaceuticals market. Frankly, if Amazon is to continue to show meaningful growth on its eye-watering 2022 annual sales of $500 billion+, there’s no way the company can ignore the healthcare industry, which comprises nearly 20% of the American economy. To do some quick math, note that for the company to grow a modest 5% year over year, it needs to generate $25 billion in incremental sales this year!
This isn’t Amazon’s first foray into the healthcare space – and I don’t expect it will be the last. Amazon has made significant investments in the sector over the last several years, some of which have been modestly successful and others that have failed. One such initiative was Haven, a joint effort between Amazon, Berkshire-Hathaway, and JP Morgan to disrupt healthcare. As I noted in 2018, though well-intentioned, the effort didn’t seem to fully appreciate the complexities of healthcare, and the alliance was disbanded in 2021. Of course, it’s too early to tell where this latest effort will land, but given what we know about it, I think Amazon stands a good chance of succeeding. Of all areas of healthcare, the distribution portion is the most logical for Amazon, given the company’s strong expertise in that segment.
I imagine some folks might argue that expanding into low margin generic medications for what appears to be a bargain price of $5 per month doesn’t sound very promising from a profitability perspective for Amazon. As one would expect, Amazon certainly does present it in very altruistic terms: According to The Wall Street Journal, John Love, VP of Amazon Pharmacy stated, “We think even if we can just make things a little bit better for a whole lot of people, that’s going to have a resounding impact on health.”
I certainly applaud Amazon’s efforts to make prescription medications cheaper; it’s a key part of our need to make the US healthcare system more affordable. However, I do believe that there is a shrewd business rationale behind this as well. By making RxPass available only to Amazon Prime members, Amazon is also creating more demand for its Prime membership. The membership generates $139 per subscription annually and opens the door for additional purchases beyond medications for those new members, thereby having a compounded impact on incremental revenue from each new customer. Additionally, due to its sheer buying power, Amazon may be able to exact a lower cost of goods on those generic medicines, thereby improving its margins relative to smaller competitors.
Finally, assuming this initiative works out for Amazon, I would expect the company to seek to expand into the more lucrative, higher margin, branded pharmaceuticals. Such an effort will no doubt face stiffer competition from the likes of CVS, Walgreens, and other traditional pharmacies. However, the net impact should be positive for patients and could very well be that elusive win in the healthcare space that Amazon has been seeking for so long.