In an era of growing income inequality, there is one retail segment you can count on for growth: drug stores. Here’s what we will cover:

• Overview
• The State Of Mail Order
• CVS’s Plan To Disrupt Healthcare
• Amazon Scares Everybody
• Insider Take

OVERVIEW

People spend on health and medicine as a top priority, even when wallets are thin. You can see it in the growth curve for total drug store sales in recent years:

[Side note: Actually, there is another retail segment that also always does well in an economy that finds some prospering and most pinched: dollar stores.]

Take a look at the number of prescriptions dispensed in recent years:

Here’s another look at the same data from a different source, one willing to forecast sales out to 2024:

Aside from an odd blip in the Trefis data in 2016, both graphs show similar growth curves, and that gives us a decent underlying motive for active interest in this industry.

But let’s poke a little deeper into the prescription medicine customer base. The CDC reports data on the percentage of the population that takes prescription drugs. For example:

The data for those with five or more prescriptions is similar. But if the percent of the population buying prescriptions is flat, how can one predict growth? Through population growth and rising prices, most likely. In other words, the prescription drug market is a mature one, with future growth — that is, future growth based on the simple extension of existing trend lines — looking solid but slow.

THE STATE OF MAIL ORDER

Just how important is mail-order subscription to the industry? Take a look at how people buy their prescriptions:

That’s a poll of where people say they get prescriptions, but my guess would be that the mail order segment represents a larger share of dollars spent than other segments, since those who buy through mail order subscriptions tend to buy a lot, and consistently. You can see that in a breakdown, of older data, also from Harris:

Locations where consumers purchase prescription drugs in the United States in 2014, by generation

And this is the pattern one expects: only 3% of Millennials buy prescriptions via mail subscription, compared with 26% of Matures. Which makes sense, seeing as Matures are so much more likely to have chronic conditions that require maintenance supply of medication.

The biggest suppliers in the mail-order market boast the usual big names:

And the big name I want to focus on here is CVS, the number two player.

CVS’S PLAN TO DISRUPT HEALTHCARE

Already the number two player in mail order, CVS has impressive and growing overall sales:

But CVS is facing a flat future for its prescription revenue, according to Trefis:

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That’s a pretty grim future for a company that depends on continued growth. And in fact, if recent news is any indication, CVS is not willing to rest on its laurels. The company is acting and reacting with initiatives to boost competitiveness.

Just last week, CVS announced it would acquire Aetna in a merger agreement worth $77 billion. The synergies of a drug store chain buying a health insurance company might not be obvious, but in actuality, CVS has been positioning itself away from a traditional drug store role towards health care services. CVS already operates over 1,000 MinuteClinics to offer walk-in health care. According to Drug Store News, that trend will accelerate:

• The companies’ post-merger plans include turning CVS Pharmacy locations into healthcare hubs where patients can seek guidance on their conditions, health coverage and prescription medications. Merlo said that if the deal goes through – the companies expect it to close in the second half of 2018 pending regulatory approval – its efforts to leverage both companies’ strengths would start immediately.

The effect on medicine-by-mail services will come slower, reports USA Today:

• Aetna insurance customers can still fill prescriptions elsewhere – at least for now. The deal is not expected to have an immediate impact on where Aetna insurance members can fill prescriptions. But in the long run, CVS could alter insurance terms to get more patients to fill prescriptions through its stores or the mail. “What Aetna customers are likely to see early on are more plans designed to drive them to CVS for not just their prescription drugs, whether it’s mail-order or in the store, but also for their medical care,” said Marianne Udow-Phillips, executive director of the Center for Healthcare Research & Transformation at the University of Michigan.

It is notable that CVS launched an initiative last month to offer especially speedy delivery services. According to the Chicago Tribune, same-day delivery is a direct response to pressure from Amazon:

• Drugstores and other retailers have been pushing more customer-friendly services in recent years in part to counter competitive pressure from Amazon. The online retail giant already offers to its Amazon Prime members in some cities same-day deliveries of consumer goods typically sold in drugstores. That’s a direct threat to the networks of thousands of stores built by chains like CVS built in order to get closer to the customer. CVS Health Corp. plans to expand same-day deliveries to Miami, Boston, Philadelphia, Washington, D.C., and San Francisco by early next year.

AMAZON SCARES EVERYBODY

That gets us to the juggernaut of American retail. Is Amazon looking to sell prescription medicine, and if so, what will it mean for the industry? A month ago, CNBC suggested a list of acquisition targets for Amazon, including mail-order pharmacy Express Scripts. Also in November, Bloomberg was speculating on the possibility, coming up with “six ways the retailer could overturn the American pharmacy market.” For example:

• There’s no reason the e-commerce behemoth couldn’t use its buying power to offer customers cut-rate generics for cash, which would appeal to uninsured patients and those on high-deductible plans. In generics especially, there are numerous markups along the way that Amazon could eliminate or pare back to capture market share.

An advantage in selling generics becomes even more compelling when you look at how much generics have come to dominate:

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(Source: QuintilesIMS via Statista)

But that was just speculation, not evidence — until news broke that Amazon was taking concrete steps necessary to break into prescriptions. Gizmodo summarized the news this way:

• The St. Louis Post-Dispatch just dropped a helluva news nugget. Citing public records, the paper reports that Amazon “has gained approval to become a wholesale distributor from a number of state pharmaceutical boards.” That might mean that Amazon wants to sell prescription drugs. Then again, it might not.

Like CNBC, The Washington Post thinks that Express Scripts is a logical partner for Amazon, and a threat to CVS. According to Carolyn Y. Johnson, writing at the WaPo’s Wonkblog:

• One of CVS’s competitors in the drug price-negotiating business, Express Scripts Holding, saw potential in an Amazon move into the pharmacy market. The company suggested that its program that sells drugs to people who pay cash was safe from Amazon disruption and that it might even be interested in working together. “If you look at the fox in the henhouse, first of all let me say, people have always worried about foxes and henhouses. And what I’d say is I think our henhouse is pretty good,” Timothy C. Wentworth, president of Express Scripts, said.

And with some clever google map sleuthing, Specialty Pharmacy Times reports that some Amazon fulfillment centers likely to be those licensed as wholesale pharmacies happened to be located close to Express Scripts locations.

So while there is no absolute or official word that Amazon is planning to sell prescription medicine, the clues are compelling.

Drug Store News reports that research firm Cowen sees Amazon’s potential entry as a formidable one:

• Cowen’s bull case for Amazon’s pharmacy ambitions projects the potential for it to seize a roughly 1% market share in 20189, growing to a 4% market share by 2023. This projection includes distribution through two-day delivery service Prime Now, same-day delivery service Prime Now and the company’s Whole Foods brick-and-mortar blueprint. But a potential kicker could be Amazon acquiring Rite Aid, which would offer the company increased retail footprint. It also would bring Amazon state pharmacy licenses, infrastructure that has already cleared regulatory hurdles, potential generic sourcing options, access to retail network reimbursement contracts and $13 billion in drug spend and a small pharmacy benefits manager in the form of Rite Aid’s EnvisionRx that would open the door to mail-order, Cowen said.

Insider Take

The prescription drug industry, long serving a predominantly older customer base with medicine by mail, has grown well and matured into a stable, slow-growth market. However, recent news suggests that disruption is just around the corner. There is a huge pressure in this country to reduce health care costs, and drug costs particularly. Big companies — including CVS and Amazon — are likely planning ways to do just that.