Amazon poised to deliver disruption in medical supply industry

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Amazon is on the healthcare industry’s doorstep. The e-commerce giant continues to transform virtually every segment of the economy as it leverages its massive distribution network to deliver logistical harmony. With a stronghold on the consumer market, Amazon is eying the business-to-business segment as it builds its seller base. Soon, that familiar smiling brown box will make its way from porches to providers’ front doors and that may make for some disgruntled medical supply distributors.

Since launching two years ago, more than 45,000 sellers have signed on to the Amazon Business platform, which essentially serves as the middleman for third-party vendors. The platform offers business pricing and quantity discounts on more than 5 million products, potential sales tax exemptions, same-day shipping and free two-day shipping for purchases over $49. Large organizations can integrate Amazon Business into their purchasing systems and directly transfer data to streamline processing.

Amazon Business, which generated $1 billion in sales in its first year, is one of its important areas for growth, executives said in earnings calls.

“Amazon Business combines the selection, convenience and value customers have come to know and love from Amazon, with new features and unique benefits tailored to the needs of businesses,” Chris Holt, leader of global healthcare at Amazon, said in a statement.

THE TAKEAWAY
The e-commerce giant will shake up the medical supplies industry as it builds out its business-to-business platform, healthcare experts are saying.

Of note in its business platform, Amazon’s growing presence in the medical supply segment is poised to disrupt distributors. Similar to the “Amazon effect” felt in other industries, a downward pricing pressure will eat away at profit margins and cause distributors to adjust accordingly.

“Look, if customers find it acceptable, Amazon would be a gigantic challenge to the business model to most medical suppliers because they have a track record of reliable service and cost structure that kills businesses,” said attorney Jim Shehan, head of Food and Drug Administration regulatory practice at Lowenstein Sandler.

Amazon Business features an array of medical supplies including infusion pumps, catheters, IV bags, sutures, forceps, hospital beds, scalpels and other lab items. One of its “most wished for” items is a 10-pack of syringes with blunt tip needles and caps for $8.39. Some of its best sellers include an AmScope biological microscope for $84.98, a Famili nonslip digital bathroom scale for $14.99 and a Jellas pocket-size PH meter for $11.99. Experts from across industrial categories claim that Amazon will typically undercut margins by 10% to 20%.

Medical supply distributor​ Owens & Minor, which sells some of its products on Amazon Business, saw its revenue dip 5.2% in the first quarter to $2.33 billion. Its gross margin also fell 5.2% to $281.2 million compared with the first quarter last year while its net income dropped 22.2% to $18.8 million. Owens & Minor officials noted that there is “ongoing margin pressure” in its U.S. distribution business.​

“Significant cost pressures will persist up and down the value chain, resulting in stepped-up competitive dynamics, margin pressure and additional industry consolidation,” Owens & Minor CEO Paul Cody Phipps said in an earnings call.

Grainger, the maintenance, repair and operating product supplier including medical supplies, also saw a dip in sales and gross margins in the first quarter. U.S. sales fell nearly 1% to $1.95 billion and its operating margin declined by 2% driven by price reductions on one-off, or “spot buys,” and online sales.

“We have seen companies diversifying into higher-margin businesses in response to the tough competitive environment,” said Britton Costa, senior director at Fitch Ratings.

The medical supply industry has been consolidating at a fast clip. Earlier this year, Becton, Dickinson & Co. announced plans to acquire C.R. Bard in a $24 billion deal and Cardinal Health said it would purchase Medtronic’s medical supply business for $6.1 billion.

These signs point to continued turbulence in the medical supply industry, said Nick Johnson, head of platform at Applico, which helps companies build out vertical platforms similar to Amazon. “Amazon will start with the simpler and more commoditized items, which will have a significant enough impact. Distributors will feel the margin and pricing pressure,” he said. “The more high-touch service areas and large contracts are not something Amazon will get into right away, but they may eventually.”

Even with the slightest increase in margin pressure, investors start to get antsy, Johnson said.

Due to regulatory hurdles, Amazon is likely to avoid such higher-end products as implants, sophisticated devices in cardiology and orthopedics, and drugs that require special handling and licensing. Some smaller healthcare organizations have sourced basic medical supplies from Amazon Business, experts said.

“It could be terrific,” said Gene Kirtser, CEO of ROi, a supply chain management company that has more than 100 group purchasing organization members. “If you are a pure distributor I would be really worried. But as a healthcare system, we want competition and innovators and costs to come down. All it will do is make traditional distributors better, which is what we’re looking for—something to light a fire.”

Eric Wilson, director of purchase to pay at Basware, which develops e-invoicing solutions, also welcomed competition.

“Anything that brings more competition in the market and benefits the end customer is a good thing,” he said. “It will be a much more competitive market when someone the likes of Amazon can bring to bear 100,000 suppliers in one fell swoop.”

Yet, Amazon may find out that the healthcare industry is a “tough nut to crack,” Kirtser said. Walmart Stores was forecast to leverage its distribution centers to make a big splash in the industry, but that never came to fruition, he said. Many low-cost items are bundled into larger contracts. If a health system begins to source goods outside of those bundles, distributors could increase prices on another segment of goods or reduce rebates.

“This industry in a way almost insulates itself,” Kirtser said. “It is such a complex ecosystem to navigate. It has a lot to do with relationships. Where Amazon plays, decisions are made more black and white. Healthcare is so gray and convoluted.”

But a company like Amazon could overcome those barriers with enough time and capital, Costa said.

Executives at Cleveland Clinic and Mercy said they had not purchased any medical devices or supplies from Amazon Business. “We receive the best value by negotiating our contracts and purchasing our products directly from manufacturers and our approved distributors,” said Jeffrey Rosner, Cleveland Clinic’s senior director of pharmacy sourcing and purchasing.

Medical distribution company Henry Schein declined to comment on Amazon Business’ impact. Pensiamo, a supply chain venture formed by University of Pittsburgh Medical Center and IBM, said it is looking to collaborate with Amazon to try to lower costs in the healthcare system.

Healthcare represents a significant growth market for companies across the industry as the population ages and people live longer. A growing population of seniors means additional healthcare services. Amazon is rumored to be looking to break into the pharmaceutical market, but the company would not comment on recent reports.

Demand for disposable medical supplies in the U.S. is forecast to expand 4.2% annually to $54.1 billion in 2020, according to a 2016 ReportLinker study.

Amazon has expanded its cloud-computing service, Amazon Web Services, which is working with companies involved in life sciences and genomics, healthcare experts said. The company has also added employees with a range of experience in healthcare.

“I’m sure it is making some people nervous,” Kirtser said.

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Amazon poised to deliver disruption in medical supply industry

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