Prescription For Amazon
Mother's Little Helper portfolio was UP today +829.84 (-0.72%)
Overall LOSS YTD: -$857.92 (-0.73%).
Our benchmark index, the S&P 500 is UP Year-To-Date (+1.67%)
“When somebody follows you 20 blocks to the pharmacy,
where they watch you buy toilet paper, you know your life has changed.”
– Jennifer Aniston, actress
I made my buys for the year on December 28, 2017, see the new portfolio here (Click Here).
The portfolio got a little bounce up today and is almost even for the year. The portfolio has a Beta that is half of the average portfolio managers which means that this portfolio experiences about half as much volatility. Lowering volatility (Big swings up and down) is one of the primary goals of our investing. By keeping volatility low you are more inclined too 'Stay Invested'. Dividends from this portfolio are on track to deliver about $2,065 by year end, or about 1.78%. What's a dividend? When you buy stock in a company, you're an owner of that company. When the company has earnings they can invest those earning back into the company, buy back their own stock, or pay the earnings back to the shareholders.
If you listen to the financial news, the markets can seem a bit chaotic. Throw in the political news and it feels more like a blender on the high setting. Another way to look at the market is a year at a time. The average return for the DOW is about 9%-10% annually. The DOW rarely hits that number, but over long periods, that's the average. I think the DOW will most likely finish the year with a 9%-10% gain and the S&P 500 will close at about 2900-3000. Those are nice gains that anyone should be happy with, especially if the ride from January to December was 'fairly' smooth.
Amazon Buys PillPack
Yesterday we heard that Amazon is buying PillPack, a small, privately held online pharmacy
business. PillPack is a full-service pharmacy that delivers a better, simpler experience for people managing multiple medications. Pills are packaged into individual doses and delivered in a dispenser to help anyone take the right medication at the right time. PillPack eliminates all the bottles with hard to open lids and those plastic boxes that some of us use to organize pills into days of the week.
We've been hearing stories about Amazon getting into healthcare and more specifically the pharmacy business for some time. I wrote last year that Amazon should buy Sears in order to acquire the KMart Pharmacy business. But what does PillPack do for Amazon and how does it effect all of us? Most importantly to the readers of this blog, is there an investment opportunity hiding in this deal?
First, we need to consider Amazon and their business model. Amazon will only enter a business that can be scaled up quickly into a large business. PillPack clearly meets this requirement. PillPack has taken the laborious task of fulfilling a prescription and improved it to the level of packaging individual doses quickly and precisely. With Amazon's resources expect that this aspect of PillPacks business is going on steroids. So PillPack brings the mechanics of fulfilling a prescription with a huge value added benefit to Amazon.
Second, PillPack is licensed to sell Schedule 1 prescription drugs in all 50 states (however they don't sell to Hawaii and Puerto Rico), my guess is Amazon will solve that problem but most likely that will require facilities in those areas. For a mere $1 billion dollars Amazon got nationwide drug licenses with no effort on their part. Walmart was bidding $700 million but drug their feet and lost the deal.
Third, PillPack integrates really well with Amazon's existing business model. It's important to realize that pharmacies don't deliver a lot of margin to the stores they are in. CVS makes higher margins on drinks, snacks and make up then on prescription drugs.
For all the screaming and yelling our politicians do about drug prices and how awful drug companies are; prescription drugs only account for about 12% of U.S healthcare costs.
The vast majority of the cost is hospital stays and doctor bills.
But Amazon has the efficiencies to make some serious revenue off those thin margins. Prescriptions are also a really horrible experience to buy. Yesterday I took my daughter to CVS to pick up two prescriptions. We waited in line, listened to everyone else's woeful stories and eventually got to the counter where the pharmacist had trouble understanding her name, which name was her first or last name, only to discover that one prescription could be fulfilled but the other wouldn't be ready for about a week. That whole experience goes away with Amazon. What's more I suspect that Amazon will incorporate prescription services into Alexa. "It's 8am, don't forget to take your medicine". "I see you're just about out of XYZ, would you like me to place an order for a refill of your prescription"?
Fourth, Amazon saves us money on just about everything. The drug industry is made up of many levels of distribution, with each level adding their cut. Pharmacy Benefit Managers (PBMs) like ExpressScripts, CVS Health and UnitedHealth Group and others negotiate for the best prices, often from a distributor. These PBM's manage prescriptions for more than 260 million American's; this is really big business, and the average American with a prescription takes 5 prescription drugs. Those pills you pay $8 for got that expensive because of the layers of distribution. Streamline this part of the business and Amazon can build a great business that benefits us all.
Is there an investment here?
Well Amazon is still a great investment. As an investor in biotech companies I'm all too aware of the cost for a small pharmaceutical company to make the transition from research and development to sales and marketing. Commercializing a new drug is exceptionally expensive and most small companies prove incapable of succeeding. The average cost to bring a new drug to market is about $1 billion dollars. After approval the creator of that new drug needs to commercialize the drug by educating doctors and the public about the benefits of the drug and then ramp up manufacturing to meet FDA requirements and demand. Commercializing a drug can take a year or more; some never make it. For this reason they usually partner with a large pharmaceutical company for the sales and distribution. The success rate of small companies commercializing their own drugs is so low that I will usually sell my shares in a company that states they intend to go this route; it's a major sign of hubris. This whole model may be changing with Amazon's acquisition of PillPack. Amazon I suspect will not be content with simply negotiating better prices from a middleman or distributor. Amazon will insist on getting the very best prices and will eventually go direct to the manufacturer, eliminating all the added markup.
If Amazon is able to remove all the sales and distribution barriers, several very important things happen:
Consumers get their prescriptions fulfilled with a much better customer experience.
Consumers get lower priced drugs through Amazon's buying power and efficiencies.
Drug companies can bring new drugs to market faster and cheaper.
Small drug companies may not need to partner with large drug companies for commercialization.
Total elimination of the middleman distribution model will significantly reduce drug prices and politicians will have to find a new bogey man to scare us all with.
Fearing a threat of losing revenues from innovative new drugs, large drug companies may go on a buying spree creating a massive wave of mergers & acquisitions in biotech. This is where I suspect the investment opportunity lays waiting.
Before anyone thinks I'm advising they go out buy up shares in micro-cap drug companies, think again. This is the most volatile, highest Beta, riskiest area to invest your money. Investing in biotech requires a different set of investing skills and rules than buying shares of Apple or an index fund. This is just a conversation about current events and how they may impact all of us. If you decide to invest in healthcare, do so with a good education about the space. If you're not familiar with biotech investing, seek out a pro and a good community to support you.
Keep Me Honest
I am attempting to keep track of my calls and predictions by logging them at the bottom of every post.
Bond prices will decline as a result of rising rates and a Dollar Shortage.
Invest in China stocks. NetEase, YY, JD, Baidu, Alibaba, mobile phone services and makers, and China BioTech
Invest in Whirlpool (see Whirlpool caveats above), Kohl’s, Costco Wholesale, Home Depot, Dollar General and Casey’s, Ingersoll-Rand, Illinois Tool works, Paccar, Honeywell, and DowDupont, PayPal, Square, Goldman Sachs, Citibank, Bank of America, JP Morgan, DBC, Apple, Microsoft and Caterpillar.
Goldman Sachs slides to around $210/share
Proctor & Gamble, Coca-Cola, Merck and Pfizer will go lower as rates rise.
The Chinese yuan will replace the dollar in international trade. Not this year, but it will happen in coming years.
The DOW will close the year with 9-10% gain.
The S&P 500 will close the year at 2900-3000.
The portfolio will generate about $2,065 in dividends.
M&A of drug companies will increase over the next 24 months.
Stay Invested,
Clay Baker
Disclosure: I am personally invested long in some or all of these funds that appear in the Mother's Little Helper portfolio or manage these investments for my Mother's portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the MLH portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. Since I may on occasion discuss Bitcoin and other cryto currencies I disclose here that I personally own investments in the cryto-currencies listed here: AMZN, DBC, VTI, VWO, VEA, VIG, XLE, MUB, TBT, GLD, Bitcoin, LiteCoin
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.
