Amazon’s initial shares were priced at only $18 when the company went public in 1997. At the time, Amazon was an online bookstore. It eventually grew and expanded into what it is today with nearly every category of merchandise, movie streaming, music streaming, food delivery and much more. However, Amazon does not show signs of slowing its expansion. Recently, Amazon aimed its sights on healthcare stocks. Investor Paul Mampilly wrote about the implications of this news in a recent Banyan Hill blog.
Amazon’s Interest In Healthcare Stocks
David Larsen is an analyst at a reputable brokerage firm known for its expertise on healthcare stocks. According to David, it is a matter of when and not if Amazon enters the healthcare area of the stock market. Paul Mampilly spent two decades on Wall Street and said that David is one of the most accurate analysts for healthcare stocks. He encouraged his readers to pay attention to David’s advice since every healthcare stockholder could be impacted if Amazon enters the market.
According to Paul Mampilly, the stocks that Amazon is interested in are likely held by some of his followers. He said that they are dividend-paying stocks, which would make the move by Amazon devastating for the portfolios of other stockholders. He explained that when Amazon targets companies, their stocks start a downward trend. He used the term “Amazoned” to describe what happens when a business that a stock controls is targeted by Amazon. The stocks only continue their downward trend, and they become classified as safe. This means that the business has many entry barriers. Paul Mampilly offered another perspective that was expressed by a pharmacy consultant and analyst named Linda Cahn. She said that Amazon would be disruptive immediately if they took a creative approach.
— Paul Mampilly (@Paul_M_Guru) October 12, 2017
What Does Amazon Want To Disrupt?
Amazon is setting its sights specifically on the prescription drug market. Although most people do not know the entire process involved in getting medications, drugs go through multiple transactions before they are wrapped up in a paper bag and handed across the counter. In an infographic shared by Paul Mampilly, the process was broken down into steps.
First, drug manufacturers must consider list price and wholesale price after gaining marketing approval for a new drug. The list price includes the cost of production, research and profits, and the wholesale price is the list price multiplied by a certain number. People with insurance that covers prescriptions usually pay a set price for name-brand drugs. Uninsured individuals pay full price. Insurance plans that are paid by employers usually come with a contract that is signed by the insurer and a pharmacy for partial reimbursement of the cost of a drug. Pharmacies find discounts and rebates from drug manufacturers for nearly every drug. There are rebates to insurers and benefit managers. When the pharmacy sells to a wholesaler, its net amount received is higher than the net amount received when the wholesaler sells it. However, all middleman parties retain a hefty profit.
Why This Is Bad For Healthcare Stocks
The process chain for prescription drugs only makes the middlemen richer. For those who need name-brand prescription drugs, it makes them up to 36 percent more expensive. Paul Mampilly pointed out in his blog that prescription drug spending in 2015 totaled $457 billion in the United States. By 2021, that number is expected to reach $610 billion. For the middlemen who profit from the chain of exchanges, this sounds like good news. Companies such as CVS, Walgreens and other chain pharmacies reap the benefits from increases. However, this cost increase is bad news for every taxpayer and medication user. Amazon could affect those projected changes.
Paul Mampilly said that when a company is Amazoned, the business usually puts a higher priority on price efficiency and transparency. The reason why Amazon targets some companies is because they are known for lacking transparency. With their little-known complex chain of costs and rebates, big pharmacy stores are prime choices for Amazon. This particular marketplace has lacked transparency for decades, and bringing transparency to it could put a halt on the massive amounts of money that go into the pockets of the middlemen. Paul said that the stock market has realized the threat posed by Amazon setting its sights on such companies, and stock pricing is starting to change to reflect that threat. For example, CVS dropped by 28 percent since spring of 2016. Walgreens also dropped, and Express Scripts saw the biggest drop of 37 percent since the summer of 2015.
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What Happens Next For Healthcare Stockholders?
The bad news for current stockholders is that the downward trend will continue. When Amazon enters the market, the stock prices will be even lower and will look cheap to potential investors. Although it may seem tempting to buy these stocks, Paul Mampilly cautioned his readers that the stocks will be death traps for investors. The only good news coming from Amazon setting its sights on chain pharmacies is that prices for prescription medications will be cheaper for consumers. However, Paul Mampilly pointed out that profit margins for Express Scripts, Walgreens and CVS will be crushed.
About Paul Mampilly
Paul Mampilly is a former hedge fund manager and a reputable investor. For many years, he worked in prestigious roles with Deutsche Bank, the Royal Bank of Scotland and the Kinetics International Fund. After that, he shifted his focus to his own investments. His fame grew in 2009 after he won the Templeton Foundation competition. To win it, he invested $50 million and turned it into more than $88 million.
When he was only 42, Paul Mampilly retired early to spend more time with his family and to focus on his passion of sharing valuable investment advice. He has a popular newsletter called Profits Unlimited, and his advice is regularly published on the Banyan Hill website. Paul Mampilly also uses social media to share his expertise. He has been featured on Bloomberg TV, Fox Business News and CNBC.