# Amazon Pharmacy poses a risk but CVS could be up for the challenge

Prime members will have the benefit of unlimited, free two-day delivery and discounts when not using insurance, including up to 80% on generic drugs.

The news sank CVS and Walgreens Boots Alliance Inc.
WBA,
-9.72%
stock, with both down 8.6% in Tuesday trading.

Whenever Amazon sets its sites on a category, it poses a risk to other players. Amazon purchased PillPack, a prescription company focused on consumers who take multiple medications, back in 2018. And even before that, experts were predicting Amazon’s move into the pharmacy space.

Read: Amazon Prime day gives lift to U.S. retail sales in October, but more pandemic pain awaits

However, Bank of America analysts think CVS can stand up to
the e-commerce giant.

“Ultimately we have said time and time again that companies across the channel need to adapt to a changing landscape, and we see CVS as being better positioned along those lines given the Aetna merger and both the broader enterprise offering and revenue diversification that an integrated medical/pharmacy services/retail offering provides,” analysts wrote in a Tuesday note.

Bank of America rates CVS shares buy with an $83 price
objective.

CVS finalized its $70 billion Aetna acquisition in Nov. 2018.

CVS reported third-quarter earnings on Nov. 6, beating the FactSet consensus for profit and revenue and announcing a new chief executive, Karen Lynch, currently the president of Aetna. Lynch assumes the role on Feb. 1.

On the earnings call, current Chief Executive Larry Merlo talked about the transformation of the company into “a new kind of diversified health services company” over his decade-long tenure. That includes the removal of tobacco products, the addition of MinuteClinic locations, investment in high-growth pharmacy areas and a focus on Latino consumers.

Watch: 3 ways the pandemic has changed the medical sector

“We are accelerating elements of our strategy with
innovative health care offerings that address the evolving consumer landscape,
providing both personalized and connected care that deliver better health
outcomes,” he said on the call, according to the FactSet transcript. This
includes customer access both in stores and online.

CVS has also been focused on addressing issues like COVID-19, with the company already looking for ways to administer the vaccine when it becomes available; creating a program just for those with diabetes; and driving efforts to make pharmacists more involved with patient care.

“[O]ur fundamental view on CVS remains unchanged: an
improving enterprise profitability story, driven by an integrated
pharmacy/medical offering and a store reboot that will repurpose square footage
that had become suboptimal and convert to higher-touch HealthHub and other
health services models,” wrote Bank of America in a Monday note. 

“This could also be complemented over time by incremental contribution from the start of the COVID vaccination process, where CVS is likely to be a key partner during the roll-out.”

After earnings were announced, Raymond James analysts also reiterated its strong buy stock rating and $90 price target. CVS is on the analyst group’s “Current Favorites” list.

“Overall, we continue to like shares of CVS given the diverse business mix and continued solid execution,” analysts said.

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Amazon should also be prepared to face stiff competition,
experts say.

“Similar to its foray into food, Amazon will find itself facing formidable,
deeply-embedded competitors with voluminous store networks that are currently
being heavily-leveraged to support drive-thru pick-up and home delivery,” said
Charlie O’Shea, Moody’s lead Amazon analyst.

“That said, given Amazon’s patient shareholder base, the company will
be able to absorb whatever costs necessary to grow this segment into a
meaningful competitive position.”

And CVS and Walgreens aren’t the only big
competitors building business in the healthcare and pharmacy space.

“With Walmart doubling down on a physical presence for healthcare, we could soon see an addition to the Walmart Plus program for pharmacy delivery in attempt to compete with Amazon’s new Prime coverage,” said Arielle Trzcinski, Forrester senior analyst.

Walmart
WMT,
-2.01%
reported its fiscal third-quarter earnings on Tuesday. The Walmart+ program was only launched in September so executives didn’t provide an update.

One advantage that Amazon might have could run afoul of
regulations, Forrester said.

“What I don’t see called out in this announcement are the
implications for HIPAA-compliant Alexa skills,” Trzcinski said, referring to
Amazon’s AI technology.

“Companies like Cigna
CI,
-1.59%
and Express Scripts had already tapped Alexa to support members in home with the ability to say, ‘Alexa, order refills of my prescription.’ If this data is integrated with Alexa, this could make easy reminders to both take medications and order refills a reality.”

Amazon stock has gained nearly 70% for the year to date. CVS has fallen 9.6%. And the S&P 500 index
SPX,
-0.47%
has rallied 11.7% for the period.