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Hedge fund billionaire explains why Amazon won't get into pharma

Julia La Roche

Billionaire hedge fund manager Larry Robbins, the CEO of healthcare-focused Glenview Capital Management, seriously doubts that Amazon (AMZN) is going to get into the pharmaceutical business.

“[We] don’t believe Amazon’s entry is imminent,” Robbins told a room of 3,000 investors at the Sohn Conference in New York on Monday. “We don’t think that it’s going to destroy the industry.”

He added that some of the vertical integrations currently taking place between companies are “not reactive to Amazon.” Instead, they are “proactive to the environment.”

He acknowledged that it’s possible that over the next decade Amazon will attempt to do something in the space.

“What could they do? Well, they’re the biggest business-to-consumer network in the world, so they can offer the unlimited supply of chronic or generic medications that people take on a routine basis. It’s not as straight-forward as offering general merchandise or other things, but they could do that.”

“The applicant will not store or ship drugs”

He argues that it’s most likely a “resounding no” that the company will get into the pharmacy-benefit manager (PBM) business or the wholesale distribution business.

That said, the market believes that the answer is an imminent yes. Robbins went on to pick that thesis apart, pointing to press reports that have fueled this speculation. He highlighted a story based on a  Leerink Partners report that was “taken out of context,” according to Robbins.

Robbins said his firm has made some FOIA requests asking for the actual licenses sought by Amazon.

“Because when you get a pharmacy license, it’s sometimes not for pharmacy. It’s for durable medical equipment.”

The FOIA requests were for 13 licenses, and seven have since come back.

“Every single one said, ‘the applicant will not store or ship drugs.’ These aren’t pharmacy licenses. These are durable medical equipment licenses,” Robbins said. “If you’re in the durable medical equipment distribution business, you should be scared. Amazon is coming for you.”

Glenview also checked Amazon job listings and found that the company hasn’t hired anyone specifically for pharmacy.

He then brought up the recent news of industry titans Amazon, JPMorgan Chase, and Berkshire Hathaway teaming up on a healthcare venture to address rising costs. He noted that in a recent interview with CNBC Buffett wasn’t able to provide much color, indicating that “it’s complicated” and “it’s not going to be easy.”

“My kids have given me better excuses for when they’re going to get their papers done than Warren Buffett can say about when they’re going to address the pharmaceutical problem in the United States.”

Robbins reiterated that while there’s a ton of buzz online surrounding Amazon getting into the pharmacy business, the company hasn’t done so yet. Robbins emphasized that they don’t have the pharmacy licenses and he doesn’t think they’re going to end up moving in that direction anyway. UPS also tried and failed back in 2006 to enter the space.

“Why? Because [there are] barriers to entry even for Amazon,” Robbins said.

Brand risk

A key moat preventing Amazon’s foray into the industry is brand risk. Amazon has held the No. 1 brand for the last several years, while the pharmacy supply chain doesn’t even crack the top 50.

“Have you ever read the risk disclosure of a PBM or a drug distributor or a pharmacy?” Robbins said.

Errors in producing, labeling, and packaging of medications could result in patient harm or death.

“If you’re Amazon, do you want that risk?”

Robbins added that since 2014 there had been 1,600 separate lawsuits against drug distributors.

“Do we think Amazon wants to be dragged in like McKesson has been dragged into the opioid crisis?” The answer is ‘no.’ For that reason, Amazon doesn’t sell firearms. They don’t do tobacco. They don’t do wine or alcohol,” he said.

There are also regulatory barriers in all 50 states that require oversight from multiple regulators.

What’s more, patients still favor the interaction with their pharmacist, so it would be a challenging area to automate.

He pitched McKesson (MCK), CVS Health (CVS), and Express Scripts (ESRX) as longs during the conference.

Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.