Shares of medical technology companies are trading lower after a Citi analyst said that Amazon (AMZN) is coming for the medical technology sector “sooner than you think.” AMAZON EFFORTS IN MEDICAL SUPPLIES: Citi analyst Amit Hazan said in a research note that Amazon is likely further ahead in accessing the medical supply chain than it is within other parts of healthcare, such as pharmaceuticals. The analyst believes that the company is working with an advisory board of “at least” 12 big hospital systems who in total represent 5%-8% of supply purchases in the U.S., and forecasts a high likelihood that one or more major hospital systems could announce the e-commerce giant as their distributor in the near term. Hazan added that hospital systems his firm spoke to were “overwhelmingly positive” towards an Amazon entry, with “a number of entities” estimating that 20%-30% of their medical supply purchases could move to Amazon distribution within the next two years. SHORT TERM, MEDIUM TERM VIEWS: Hazan said that, in the near-term, his firm does not see much of a fundamental risk for the medical device sector from an Amazon entry, though in the medium-term he sees a high probability of a major dislocation of both distributors and Group Purchasing Organizations, or GPOs. This in turn will likely result in incremental pricing pressure for the medical device sector. In addition, the analyst believes that, in the medium to long term, GPOs will likely no longer be a part of the contracting process, and that new online distribution and wholesaling models, such as Amazon’s, will come to dominate the supply chain. RISKS/OPPORTUNITIES: The Citi analyst noted that key risks to the medical device sector include greater price transparency, greater competitive threats from smaller players, and more efficiency at the provider site. Hazan added that manufacturers may also see certain opportunities to significantly cut costs related to contracting and logistics, significant potential first-mover opportunities for those who embrace the change, and opportunities for expanded reach at attractive operating costs. Despite all of these forecasts, Hazan said that, on a stock specific basis, it is too early to tell which companies are most exposed in either direction and by how much. PRICE ACTION: Near midday, medical device makers Baxter (BAX), Becton Dickinson (BDX), Boston Scientific (BSX), Medtronic (MDT), Stryker (SYK) and Zimmer Biomet (ZBH) were all down at least 1.6%, while healthcare distributors Cardinal Health (CAH) and McKesson (MCK) are also trading lower. AmerisourceBergen (ABC), on the other hand, is up marginally.
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