a16z Podcast - a16z Podcast: On Recent Consolidation in the Healthcare Industry

Episode Date: April 16, 2018

Many of the healthcare headlines lately have been about consolidation in the industry: Walmart and Humana; Aetna and CVS; Amazon, JP Morgan, and Berkshire Hathaway. But what does it all mean for patients, and startups -- Will it decrease costs? What opportunities may arise as a result? In this quick hallway-style conversation, originally recorded as a video, some of the partners on the a16z bio team (Jorge Conde and Vijay Pande in conversation with Jeffrey Low) discuss what's going on as we see more and more vertical integration across the healthcare value chain.

Welcome to the A16Z podcast. Today we're having another of our hallway style conversations. These episodes are based on videos that are also available on our YouTube channel, YouTube.com slash C slash A16Z videos. Given all the headlines lately around consolidation in the industry, Walmart and Humana, Etna and CBS, Amazon JPMorgan, and Berkshire Hathaway, our biofund team, including Jorge Condé and Vijay and Jeffrey Lowe, discusses what these moves signal as well as their implications for customers

costs, and any new opportunities that may arise. So, hi, you have the A16Z bioteam here, and I think we wanted to spend a few minutes talking about a lot of the headlines that are hitting in health care in the very recent weeks. So going back to late last week, there was news that Walmart's in the early stages of potentially acquiring Humana. So this is large retail chain buying a large insurer. and to me what's remarkable about that a couple of things

really one the first one is that Walmart in its own right is a major pharmaceutical sorry pharmacy chain so that's incredible in and of itself and the second is that you're going to see this sort of vertical integration or increased vertical integration

between the entire value chain so just to like tick through it in a very simplistic form right you have you know your your pharmaceutical companies that make drugs you have your drug wholesalers that go out and buy bulk drugs, usually generics. You have your pharmacies that

essentially act as the channel to access medicines. You have your specialty pharmacies that are responsible for ensuring that really high cost, high touch, complex medicines get to where they need to be in hospitals and other places. Then you have your pharmacy benefit managers, the PBMs, that ensure that the insurers know the rules or have established rules to figure out who can get access to which drug as a way to control cost and ensure that the right drugs are getting to the right patients. So if you take all of those various players, and I'm ignoring the hospital systems, I'm ignoring the patient, but if you take the insurers, the pharmacies, the PBMs, the drug wholesalers,

the remarkable thing is that this entire industry is sort of integrated into one giant monolith. So we have Walmart potentially buying Humana. We have Aetna, CVS, yeah. And then we have this sort of mystery thing on the employer side, which I didn't. didn't touch on, but, you know, Berkshire Hathaway and Amazon and J.P. Morgan are sort of teaming up to do some, you know, yet to be unveiled play in healthcare. Like, what is, what, what's going on? Yeah, I mean, one of the arguments is that this could be a way to decrease costs,

but we'll see, I guess. And also just consolidation in general, I think in principle would allow for decreased costs and increased value because there are more people that are aligned, but it's still pretty early. I think of them as two different classes of things. There's on one side, you know, we have Walmart, Humana, and A CBS. On the other side, we have, you know, Amazon, J.P. Morgan, and Berkshire Hathaway. I think those are two fundamentally different things. So on the one hand, you have this consortium, very large employers, but healthcare is a local business.

And those employers, while they're huge, they are so geographically dispersed that I'm sure they can drive good deals. and local markets, but you can't put all of the employees in Berkshire Hathaway, you can't put them all into, you know, one local hospital and get all the best prices. So I think that the effect of that consortium is going to be, you know, a little less than something on the other side, where you see Walmart and CVS very local. They're able to drive, there's a Walmart or CVS in a lot of small towns, and they're going to be able to drive more value because they own the patients and those touch points and having that locality

I think is going to make a big difference compared to a dispersed self-insured employers. What happens to that divide you just laid out when Amazon buys a pharmacy benefit manager?

Or becomes a pharmacy. You know, I think becomes a pharmacy benefit manager. I think PBMs right now are, you know, so consolidated. And, you know, I think everybody, you know, as Amazon, as Bezos says,

you know, their margin is my opportunity. You know, the margin in the PBM business so opaque, and, you know, I think it's one that in the news, you know, people are crying about it at all times. You know, I think Amazon and Bezos there, you know, might see that as an opportunity in themselves. And, you know, I wouldn't imagine they go buy it. I imagine they go do it themselves. Yeah. And it's an interesting question, right? Because I think that, you know, that is one area that's ripe for disruption.

Right. And so on the one side of things you're seeing just mass consolidation happening, you know, vertically in terms of vertical integration with the large players all sort of teaming up across the various segments of the value chain. But on the other, you see that there's so much change that one would imagine that there's ripe opportunity for disruption. So if you're an entrepreneur in this space and the entire value chain, the landscape of the value chain is quite literally shifting below you, given all the news, what do you do? I got an idea for, if you're an entrepreneur, what a me interesting area would be a digital

therapeutic PBM. I mean, distribution is really hard to get this out there and get reimbursed. And right now, all these digital therapy companies have to basically build this themselves, as if you were like Bayer or having to build a PBM yourself or something like that. And so that's an opportunity where at least I think a startup could come in and not have to fight against ginormous incumbents. Yeah, and that's a great idea. I think it's a great idea. Another one that to me is potentially an interesting one is all of the things, Jeffrey, you were talking about,

whether you're on the employer side or whether you're on the consolidating side of the value. chain, both sides are going to have to seek increase efficiencies if they're going to actually eke out margin and therefore be able to reduce costs in the system, at least internal costs in the system. So if I were an entrepreneur in this space and I'm looking across the value chain, I would say what opportunities exist and open up when you get full vertical integration for the application of new technologies that may not have existed before because of sort of the transactional frictions of dealing with multiple players. I don't know what that looks like, but that's, I think, one area where you can spend your time.

Yeah, certainly skating where the puck is going to go rather than where it is, and healthcare is changing so quickly that... Yeah. So, so any predictions? I mean, does Amazon buy one of these? Do you think they build? I think Amazon, you know, is clearly doing, they're clearly using this as a partnership at which they can learn a bunch of things.

They're hiring a bunch of people. You know, we see other players like Apple getting into the space hiring a bunch of people as well. They're learning. They're hiring. But, you know, I don't think that they go and, you know, acquire. I don't think they acquire something. I don't see a marquee property like Whole Foods in the space that they go acquire.

Those places are already to either big or acquire something else. You know, could you see Amazon acquiring CVS and Aetna now? You know, I find it hard to believe, but Bezos always surprises. Yeah, I had to make a prediction, just as you said, a digital PBM. I think, you know, if we look at, you know, what gave rise to the specialty pharmacy was the increased complexity of injectables and biologics. we're moving to a time where you know we're shifting from

those kinds of medicines to cell therapies and to gene therapies and I think it's going to represent it's going to present an entire new sort of set of complexity from a logistic standpoint from a drug handling standpoint so I would expect that we'll see sort of the equivalent of a

digital PBM logistics chain emerge for gene therapies and cell therapies and other advanced types of medicines I think for cell therapies you know the time just might be sooner because the cost is so great right now you know digital therapeutics, I think, could be akin to where there are various genomic PBMs and there were just not enough genomic tests. So, you know, those companies were maybe just too

early. The cell therapies are expensive now. People are spending money now. So if that business is built and the supply chain is so difficult, you know, maybe that is a very different business than specialty pharma is, you know, currently. Yeah, well, it's certainly interesting times. It would be fun to see what happens with all this.