WIXLIB

Executive InsightsFigure 4Amazon’s medical supply distribution strengths todayNonacute careImplantable and physicianpreference devices(e.g., ortho, ute carePhysician and dental offices, etc.Home careTypically directly fulfilled bymanufacturers that are ofteninvolved in assisting duringproceduresLower applicability forimplantables in most caresettings and directly fulfilled bymanufacturersPotential opportunity for Amazonto enable fulfillment to highlyfragmented care settings(e.g., ambulatory surgery centers)Not applicableAlready well-managed by highlyefficient mainline distributors(Cardinal, O&M, Medline) thatprovide LUM and inventorymanagement servicesWell-managed by highly efficientdistributors (e.g., McKesson,Schein) that provide inventorymanagement and other valueadded services that Amazoncannot provideAmazon may be able to carve outspace in specific products thatrequire urgent shipping, whichcurrent distributors cannot provideAmazon lacks patient billing andpayer contracting capabilitiesthat are required for reimbursedproductsAmazon currently is wellpositioned to offer patientsnonreimbursed productsHigh-value/complex capitalequipmentTypically directly fulfilled bymanufacturers that are requiredfor installation and technicalsupportTypically directly fulfilled bymanufacturers thatare required for installation andtechnical supportAmazon lacks patient billing andpayer contracting capabilitiesthat are required for reimbursedproductsAmazon currently is wellpositioned to offer patientsnonreimbursed productsOther(e.g., one-off, self-pay,nonrecurring, low-complexityequipment)Reasonably well-supported bymainline distributors that havelarge catalogs and existingpresenceAmazon may offer incrementalbenefit of convenience forindividual purchaserAlthough these offices arereasonably well-served alreadyby distributors, Amazon mayoffer incremental benefit ofconvenience (and potentiallylower pricing) for physicians/administrators who have morepurchasing discretion thanhospital staff doAmazon currently iswell-positioned to offer patientsnonreimbursed, self-pay productsLowHighCurrent Amazon capabilities fitmanagement, and clinical and nonclinical workflow; andeven provide on-site supply chain management. Withinhome care, distributors actually adjudicate patient billing andclaims questions directly with payers, saving providers andmanufacturers significant time and effort.2. Although Amazon can meet some customer needs acrosscare settings, its current capabilities are insufficient to meetthe most critical needs of many customers. Fundamentally,the true test of Amazon’s ability to disrupt the medical suppliesdistribution landscape is whether its value proposition willPage 4 L.E.K. Consulting / Executive Insights, Volume XX, Issue 47resonate with different segments of the market and drive shifts inhow and where customers purchase.Amazon’s value proposition lies in providing a wide variety ofproducts rapidly and easily in low-order volumes, but thosebenefits are more suited to fragmented and individualizedpurchasing rather than to centralized procurement departmentsthat are increasingly driving decision-making. Moreover, to betruly effective across care settings, Amazon’s offerings wouldneed to be customized to allow for differences in packaging,delivery frequency, etc.

Executive InsightsFigure 5Owens & Minor margins, past 10 yearsIn November 2017, Fitch downgraded Owens & Minor to “BB ,” claiming that itis expected to continue to face pricing and margin pressures through 2019.3Operating earnings(2008-17)Percentage of revenue2.52.5Owens & Minor completed two acquisitionsin 2014 (Medical Action and ArcRoyal)totaling 261.1 million (net of cash acquired).2.42.42.22.2Owens & Minor entered intoa purchase agreementto acquire the Surgical andInfection Prevention business ofHalyard Health for 710million and completed theacquisition of Byram 01220132014201520162017 7.2B 8B 8.1B 8.7B 8.8B 9B 9.4B 9.7B 9.7B 9.3BSource: Owens & Minor 10-Ks; L.E.K. analysisAlthough Amazon is well-positioned today with respect to certainproduct areas and channels (see Figure 4), the majority of caresettings and product types do not fit well with Amazon’s valueproposition.contracts with payers, patient billing capabilities and strategiccollaborations with manufacturers on how to deal with pricingissues), the question remains: Is medical supplies distribution anattractive market for the retail giant?Specifically, acute-care settings, where the bulk of medicalsupplies are purchased today, require incredibly high servicelevels, the ability to order in bulk and private-label products todrive savings. They also expect a variety of services that manydistributors offer, ranging from inventory management to kittingto address their complex and specific needs.While medical supplies distributors enjoy significant revenues,their margins tell another story. In fact, pure-play distributors(those that do not have a significant private-label presence) haveseen their margins decline steadily over the past 10 years (seeFigure 5). These low and declining margins are the primary reasonall the major medical distributors are expanding their highermargin, private-label/branded product portfolios. Medline, ahighly successful manufacturer and distributor of medical supplies,has long leveraged its distribution business to carry its highermargin private-label products. Simply stated, pure medical suppliesdistribution services are largely commoditized and alone may notappear attractive enough to justify significant entry. Although asnoted, Amazon could acquire a company like Owens & Minor toinstantly position itself as a medical supplies distribution leader,but it is hard to see why it would want to do so.In contrast, nonacute-care settings, such as physician and dentaloffices, as well as home care, may find benefits in Amazon’s valueproposition, though typically for lower-margin one-off products(e.g., crutches, unspecialized braces).3. Low medical supplies distribution margins (and alreadyhigh levels of market efficiency) diminish the attractivenessof and rationale for Amazon investment vis-a-vis otherpotential growth opportunities. Finally, assuming Amazoninvests significantly in filling its capability gaps (e.g., beginsto offer distribution-related services for hospitals, home-carePage 5 L.E.K. Consulting / Executive Insights, Volume XX, Issue 47

Executive InsightsMoreover, although Amazon can build and/or buy capabilitiesto expand its footprint in medical supplies distribution, some ofthese changes (i.e., bulk shipping, inventory management andstandardized decision-making) are big departures from whathas made Amazon successful today, which suggests a medicalsupplies distribution arm would have relatively low synergy withthe company’s existing business and capabilities (though that hasnever stopped Amazon before).So, can you buy your critical-care hospital productstomorrow on Amazon Prime? Probably not. But givenAmazon’s seemingly limitless wealth and interest in solving big,complex problems, we should eventually expect Amazon to growits capabilities to become a more serious player in distributingmedical supplies — assuming it wants to.Until then, there might be ways for those in the medtech spaceto leverage today’s Amazon to sell and expand their reach intofragmented, nonacute-care settings, particularly for companies/products with a low share currently, and/or to provide leverageagainst mainline distributors that may be competing with privatelabel products. In short, we expect Amazon to continue togradually expand into medical supplies distribution but to do so inmore limited segments. At least for the time being, its capabilitiesand apparent focus, based on the PillPack acquisition, seem to bein other parts of healthcare, namely pharmacy/drug distribution.About the AuthorsJonas Funk is aManaging Directorand Partner in L.E.K.Consulting’s Chicagooffice. He has more than17 years of experience atL.E.K. and has directedhundreds of consultingengagements, primarily focused on growthstrategy and mergers and acquisitions supportin the medtech and life sciences industries.Sheila Shah is anEngagement Managerin L.E.K. Consulting’sChicago office andis focused within themedical device andprovider space. Sheadvises clients onstrategy development, acquisition screens,global market assessments, and both buy- andsell-side commercial due diligence.Ilya Trakhtenberg isa Principal in L.E.K.Consulting’s Chicagooffice. He has ledconsulting engagementsfor dozens of clients,focusing on growthstrategy, M&A supportand commercial excellence in medtech andhealthcare more broadly.About L.E.K. ConsultingL.E.K. Consulting is a global management consulting firm that uses deep industry expertise and rigorous analysis to help businessleaders achieve practical results with real impact. We are uncompromising in our approach to helping clients consistently makebetter decisions, deliver improved business performance and create greater shareholder returns. The firm advises and supports globalcompanies that are leaders in their industries — including the largest private- and public-sector organizations, private equity firms, andemerging entrepreneurial businesses. Founded in 1983, L.E.K. employs more than 1,200 professionals across the Americas, Asia-Pacificand Europe. For more information, go to www.lek.com.L.E.K. Consulting is a registered trademark of L.E.K. Consulting LLC. All other productsand brands mentioned in this document are properties of their respective owners. 2018 L.E.K. Consulting LLCPage 6 L.E.K. Consulting / Executive Insights, Volume XX, Issue 47

Amazon Business also has over 85,000 sellers on its platform Amazon Business is even offering business analytics and loans to its sellers in the U.S., UK and Germany In 2015, the launch year, Amazon Business saw over 1 billion in sales Hospital supplier shares dive as Amazon reportedly ramps up medical supply business