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Giant tech companies are particularly appealing to rumor-mongers, sometimes apparently by design. A few years ago, it was Apple (AAPL) -- Steve Jobs seemed to delight in sending the rumor mill crazy, frequently dropping obscure hints at projects real and imagined in public appearances.

Google (GOOG: GOOGL) offer few hints, but with Google X, a whole subsidiary devoted to moonshot projects operating under a veil of secrecy, speculation about their projects and intentions is inevitable.

More recently, Amazon (AMZN), has been the focus, with multiple reports that it is contemplating expanding in different ways and into different markets. Some, like drone deliveries, remain just speculation, but others, like an entry into the grocery business, have become reality. None of this is really surprising.

Giant tech companies are driven by growth and are always looking to expand, but when a new “story” breaks seemingly every day, it can be easy to lose sight of the truly significant moves being considered.

Earlier this year, the buzz about Amazon was centered on reports that they were considering a serious push into healthcare, but once the Whole Foods buyout got underway, the implications and effects of that move started to dominate coverage and the healthcare story got largely forgotten.

It has resurfaced recently with reports that the company is in contact with several pharmacy benefit managers (PBMs), companies that act as middlemen between drug companies, payers such as insurance companies, and you and me, the patients. That would imply that retail drug supply from Amazon is on the cards, and any hint of that makes AMZN a lot more attractive than it may otherwise seem at a forward P/E of around 125.

The reason is simple: size. Healthcare represents around seventeen percent of U.S. GDP, making it a multi trillion-dollar industry. Prescription drugs are a large and growing part of that, but looks like an area where Amazon’s style of disruption and simplification could offer huge benefits.

Multi-layered distribution systems involving the aforementioned PBMs and specialty pharmacies have resulted in a complex industry that has multiple layers and many barriers to entry. The rewards for negotiating those barriers and simplifying the supply chain, however, are massive and those are the things that Amazon does best.

There are some that maintain that the move into healthcare is not imminent and is still merely a rumor, but that misses the point. Timing is not really an issue with an opportunity this size. If there is evidence that it will, or even might, happen in the future, it increases the value of the stock.

In fact, what is being talked about here is not a move into healthcare per se. Amazon has already done that and has significant healthcare specific sales. That gives a base to build on, and expansion into pharmacy is not therefore much of a stretch.

Some reports indicate that Amazon is initially focusing their attention on generics and consumers with no insurance or high deductible patients who pay for their own prescriptions directly. That makes sense on several levels. It bypasses the need to negotiate contract pricing with the drug companies, where established relationships with PBMs and payers would be hard to break, and taps into the growth areas of the market.

Generics continue to grow as more and more patents expire on widely used medicines, and the direct payment market is also growing. The massive increases in insurance costs have forced many people into high-deductible plans, and if the federal mandate to have health insurance is removed, many will take the risk of self-insuring.

That segment therefore looks set to grow, and, as anybody who has ever paid directly for prescriptions at prices way over those charged to insurance companies will tell you, the system has plenty of room for rationalization.

Despite the obvious opportunity and its potential for massive impact though, Amazon’s exploration of healthcare often gets lost in the talk of buying TV channels, adding features to Alexa, and making glasses. Don’t get me wrong, all of those, and any other rumors that follow, could have a positive impact on AMZN, but an expansion further into an industry that represents nearly one fifth of the economy is what we should be focused on. It may not come quickly, but just the prospect of it makes the stock look like a bargain after recent declines.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of NASDAQ, Inc.

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