Janus Henderson: Healthcare – Amazon’s next disruption target?

Testimony to the high regard that the market has for the heads of Amazon, JP Morgan, and Berkshire Hathaway, the recent announcement of a partnership with no management team or headquarters, with a non-profit focus, has had a significant impact on not only the share prices of the three companies but also many others in the healthcare sector. So far there is little detail on what the entity will do other than try and provide technology solutions for "simplified, high quality and transparent healthcare at a reasonable cost."

It is the history and reputation of the three companies, and Amazon in particular, that has filled many with trepidation, be it investors in retail pharmacies, managed care, drug distribution, pharmacy benefit managers, and even pharmaceuticals.

Amazon’s reputation as a market disruptor

 In e-commerce Amazon has disrupted retail. Its Prime membership offers faster delivery, a wider array of products, new services for sellers and better product information for consumers. Meanwhile, Amazon Web Services (AWS) began as an internal project to help Amazon manage its own internal IT requirements better. In little than over 10 years AWS has become the world’s largest public clouding platform. Estimated revenue for 2017 is over US$17bn, providing cheap, fast storage and compute power to internet start-ups, government bodies, such as the Central Intelligence Agency (CIA) and Federal Bureau of Investigation (FBI) in the US; the National Health Service (NHS) in the UK, as well as enterprises across many sectors (Newscorp, GE, and Capital One to name but a few).

The parallels have not been lost on the market. Amazon has capabilities in logistics, procurement, and in cloud services as well as its growing skill set in artificial intelligence (AI) that can be applied to the exponential growth we are seeing in data – particularly with regards to health and well-being (eg, Apple Watch, Fitbit, DNA mapping, health checks, MapMyRun app).

A solution to rising healthcare costs needed

The US healthcare sector, which includes insurers, managed care providers, pharmacy benefit managers, distributors, and drug retailers, all sit between the providers of services and goods (drug and medical technology companies, hospitals and physicians), and consumers. In May, Berkshire Hathaway CEO, Warren Buffet at the company’s annual shareholders meeting, remarked that healthcare costs have become a bigger issue for American businesses than tax (healthcare costs have exploded from around 6% of GDP in the 1970s to over 17% in 2015, compared with taxes rising from 2% to 4% of GDP). That leaves the healthcare sector a prime target for disruption. Consumers and employers are desperate for more affordable options, more consumer choice, better outcomes, as well as higher price transparency through improved procurement and distribution. 

Strong potential

 The tie-up announcement made it clear that the newly-formed entity had yet to propose solutions. It will take years to form and to build upon systems and learnings from the more than 1.1m lives that the scheme will cover. This is another example of technology continuing to take share in our daily lives and how AI will be deployed across a wide range of sectors. The fact that none of the three companies are in healthcare gives them a fresh perspective and makes this entity so potentially disruptive.

The learning curve will be steep and investors will have to navigate the ‘hype cycle’ on the potential disruption. While margin pressure for the healthcare supply chain is currently premature, as is any analysis of the market size opportunity for the trio, undoubtedly Amazon, JP Morgan and Berkshire have identified a clear problem needing a solution. Amazon CEO, Jeff Bezos once said, “your margin is my opportunity” − the US healthcare system certainly qualifies for providing ample opportunity.

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