Page 64 - The Economist

64 Business The Economist December 9th 2017
zon going into prescription medicine. The Video games
American pharmaceutical market is an al-
luring one for the online giant. It is large, Looting the
worth $450bn in 2016. And it is widely re-
garded as inefficient, leaving customers punters
without good information about products
theyarebuying,becauseofopaquepricing
and middlemen like the PBMs. According
toasurveybyCowen,aninvestmentbank, Could video games fall foul of
67% of Amazon Prime customers would anti-gambling laws?
like to buy prescription drugs on the web- DECADE ago the idea of paying real
site. Amazon could be earning as much as Amoney for virtual items was strange
$10bn a yearfrom drugsby2023, itreckons. and exotic. These days many video-game
Compared with books, toys and other publishers build their business models
bulky items, the drugs market would ap- around it. Some of the world’s biggest
pear to be a nirvana for Amazon. Prescrip- games, such as “League of Legends”, cost
tion medicines weigh almost nothing, take nothing to buy. Instead they rely for their
up little space and can cost hundreds or revenue on playersbuyingthingsforuse in
thousands ofdollars perpill. But three hur- the game, such as new characters to play
dles blockthe road to this idyll. with orcostumes to put them in.
First, the sale and distribution of drugs A new twist on that model has been at-
isheavilyregulated.Amazonwouldnotbe tracting the attention of regulators in re-
able to dump prescription drugs into the cent weeks. “Loot boxes” are yet another
same fulfilment channels as its other pro- type of “in-game” item that gamers buy
CVS Health buys Aetna ducts. It must acquire pharmaceutical li- with currency. Unlike the usual sortof pur-
Doses of reality cences for any state where it wishes to op- chase,however,playersdo notknowin ad-
vance what they are buying, for the con-
erate (it already has these in 12 states, but
has said it means to use them only to sell tents ofa loot box are generated randomly.
medical supplies, which also require the li- Sometimes they might be desirable, and
cence, not drugs). Amazon would also therefore valuable; prized items include
needapprovalfromtheFoodandDrugAd- newgesturesor“emotes” fora character, or
NEW YORK ministration ata federal level. Operating in a pearl handle foran automatic weapon. If
The prospectofAmazon’s entryis one a controlled industry would be a depar- less alluring, well, players can pay a bit
spurto a massive deal in health care
ture fora free-wheelingtech firm. more money to have anothergo.
E’RE bringing health care to Second, most drugs are paid for by in- If you think that sounds a lot like gam-
“W where people live and work.” So surers, not by consumers. The PBMs per- bling, you are not alone. In November Bel-
declared Larry Merlo, chief executive offi- form the complex task of matching pur- gium’s gaming commission announced
cerofCVSHealth,anAmericanretail-phar- chases with patients’ insurers, so that that it had opened an investigation into
macy giant, on December 3rd, announcing drugs are paid for. That is a source of the “Star Wars: Battlefront 2” and “Over-
a$69bndealtobuyAetna,ahealthinsurer. sort ofopacity that Amazon would seek to watch,” a pair of shooters published by
The deal is worth some $77bn after CVS’s remove. But the e-commerce firm would Electronic Arts (EA) and Activision Bliz-
assumption of Aetna’s debt, and is due to still need to handle issues of payment in zard, respectively, that both feature loot
close in the second halfofnext year. the background, without nagging consum- boxes. China, where the virtual-item busi-
Shares in both firms fell on the news, ers forinsurance details. ness model is very popular, has already
perhaps because the deal is likely to yield Third, although drugs do come in small passed laws restrictingtheirsale.
results only over the long term. Most tie- packages, their shipping and handling of- Lawmakers and regulators in South Ko- 1
ups in America’s health industry in recent ten require special attention. Many drugs,
years have been “horizontal”, with firms such as new cancer treatments, must be
attempting to acquire direct competitors; kept cold throughout the supply chain.
instead, the CVS-Aetna deal representsver- Others, like opioid painkillers, are danger-
ticalintegration.Asaresult,therearefewer ous, and must be kept in locked cages. Yet
obvious overlaps and less fat to cut. these drugs are often also the most expen-
One rationale for the deal—assuming sive. If Amazon cherry-picks drugs that fit
the regulators wave it through—is for the well into its existing network, it will miss
merged firm to develop personalised out on a large slice of the market. Custom-
health care that people can easily get ac- ers could find it confusing to be able to get
cess to. CVS runs some 1,100 walk-in medi- some prescriptions through Amazon’s
calclinicsinadditionto9,700retailoutlets. store but not others.
It is also a pharmacy-benefits manager Amazon could find itself a partner,
(PBM),asortofmiddlemanthatbuysdrugs however. In July the boss of Express
forinsurers and companies. Because it will Scripts, a PBM, said it could use Amazon as
swallow Aetna’s records on patient medi- an “efficient provider in networks”. Or
cal care, its physical outlets will have ac- Amazon could buy what it needs. John
cess to far more information about pa- Blackledge ofCowen suggests that it might
tients’ chronic illnesses. As Aetna’s boss, buy Rite Aid, a big pharmacy chain, giving
Mark Bertolini, put it, “We have 10,000 it licences, a “cold-chain” infrastructure
newfrontdoorstothehealth-caresystem.” and Rite Aid’s small PBM in one swoop. A
There is another, more defensive, impe- prospect like that goes a long way to ex-
tus behind the deal—the prospect of Ama- plainingthe marriage ofCVS and Aetna. 7 Four-sided bandit