The Beginning of the End for Big Pharma

Dear Reader,

Billionaire Mark Cuban and Kroger, the world’s largest grocery retailer, just announced that they’re teaming up to disrupt the pharmaceutical industry.

Mark Cuban launched his “Cost Plus Drugs” back in January of 2022. Its business model is simple – to sell generic drugs at a fixed 15% markup above their cost.

Until now, buyers were limited to buying directly from Cost Plus Drugs online.

But this partnership with Kroger could see his bargain generics in over 2,000 supermarkets.

This is putting the entire generic drug industry on notice.

And it has important implications for us as consumers… and investors.

How We Get Our Prescriptions

Generic drugs are well known for being cheaper than their name-brand counterparts. But even then, most of your cost is tied up in middlemen like pharmacies and insurance companies.

According to researchers at the University of Southern California Center for Health Policy and Economics, for every $100 spent at the pharmacy…

• $41 goes to the manufacturer.

• $41 goes to middlemen including the pharmacy.

• And the remaining $18 finds itself split between insurers and other parties in the system.

That means if you spend $100 at your local CVS and get the generic version of your medicine, that CVS is getting more than a 40% cut.

We think we’re getting a good deal when we buy generic drugs. But Cost Plus Drugs shows us that it could be a lot better.

Cost Plus Drugs purchases pharmaceuticals directly from manufacturers. Which bypasses the middlemen who are taking roughly 60% of every dollar you spend at the pharmacy.

Cost Plus Drugs delivers that at a fraction of the cost, just a 15% markup. And very soon, Cost Plus Drugs’ manufacturing facility will be up and running. That will allow them to keep an even bigger cut of the profit while keeping prices well below industry standards.

“Your margin is my opportunity”

That’s a quote from Jeff Bezos, founder of Amazon.com.

He realized that he could undercut industry incumbents like Sears and Walmart by building a business that could survive on thinner margins.

His ultimate goal was to capture a bigger piece of the market. And as we know, that’s precisely what Amazon did. As of last year, Amazon commanded 37.8% market share for e-commerce in the United States. Walmart is a distant second at 6.3%.

I wouldn’t be surprised if Cost Plus Drugs – and others like it – accomplish the same thing for the pharmaceutical market in the years ahead. And this partnership is a step in that direction. It’ll allow Cost Plus Drugs to have access to millions of customers it wouldn’t have otherwise.

This is the kind of disruptive innovation that silently sneaks into an industry and completely uproots the status quo.

I share this story because it’s a perfect example of the type of opportunities we look for at Brownstone Research.

There are several industries that have barely innovated over the decades. They’re just coasting off inertia and dominant market share. The pharmaceutical industry is a perfect example.

The cost of prescription drugs has grown by 5X since 1984, according to the Bureau of Labor Statistics. That outpaced the rate of inflation by three times. And even with that rise in cost, is our experience at the pharmacy any more convenient or efficient?

Of course not…

Pharmaceuticals is a bloated industry just waiting to be disrupted. Cost Plus Drugs is one example. Amazon’s acquisition of pharmaceutical delivery company PillPack in 2018 is another. There will be more.

Cost Plus Drugs is a private company. That means we can’t invest in it now.

However, I’d stay away from generic drugmakers like Teva Pharmaceuticals as long-term buy-and-hold stocks. A company like Cost Plus Drugs has the potential to slowly steal away market share.

Regards,

Colin Tedards
Editor, The Bleeding Edge

P.S. As readers know, the disruptive trend we’re laser-focused on right now is artificial intelligence. But how will the adoption cycle play out? And what are the investment implications? I plan to answer these questions in today’s edition of The Near Future Report, due out later today. Paid-up subscribers should keep an eye out for their monthly issue.