Is Amazon’s purchase of PillPack a prescription for disruption in the pharmacy industry?

Profile picture for user slauchlan By Stuart Lauchlan July 8, 2018
Is Amazon coming to take away your local pharmacy? Maybe, but it’s likely to be a long, tough fight against the incumbents if so.

Medication pills drugs
Taking the medicine

First they came for the book industry; then they came for the grocery business; next up for Amazon - pharmacies?

Amazon’s planned purchase, for a rumored $1 billion, of PillPack is being closed watched as an indicator of where the retail behemoth is fixing its attention next.

Founded in 2013, PillPack supplies pre-sorted prescription drugs and other services to people in the U.S. who take multiple medications. The firm sorts such medications into individual packets, so patients don't have, as well as assisting with renewals and refills.

With an ageing population problem, that’s big business and only likely to get bigger. A recent Morgan Stanley estimate suggests that the average U.S. citizen over the age of 65 has around 37 prescriptions per year. And if Amazon can tap into that demographic, it might also be able to beef up adoption in the weakest market for its wider Prime offering - the over-55s.

In the U.S., pharmacies need to be in the networks of Pharmacy Benefit Managers (PBMs) in order to dispense drugs. PillPack is in several health insurance and Medicare Part D drug plan networks as well as holding pharmacy licenses in all 50 states.

All told, it’s perfectly easy to read Amazon’s intentions with this acquisition as a declaration of intent, but at present merely a warning shot over the bows. Neil Saunders, Managing Director of market analyst GlobalData Retail, argues:

In our view, this is only the first play in what will be an increasingly aggressive strategy by Amazon to develop a much more significant presence in the pharmacy market. This is incredibly bad news for traditional players, like Walgreens and CVS, who stand to lose the most from Amazon’s determination to grow its share.

Indeed, Walmart - already an e-commerce rival to Amazon - has a head start here and already offers a similar service to PillPack. So picking up the start-up would enable Amazon to play catch-up quickly. Ironically, Walmart is said to have looked at making its own bid for PillPack in 2017, but negotiations came to nothing.

Keep calm

Any market sector Amazon makes a move on - or is suspected of making a move on - is these days assumed by investors of being under imminent threat of disruption. News of the PillPack purchase plans wiped billions from the market caps of the likes of CVS and Walgreens Boots Alliance.

Stefano Pessina, CEO of the latter of those, is, for the moment, adopting a ‘keep calm and carry on’ mindset, refusing to panic or to rush out and find himself his own start-up to purchase:

I have always said that we have to separate the emotions from the facts. We don't see any reason to be worried. We are not complacent. I repeat this. We have a clear plan and I believe that we will continue with the execution of our plan. If we did M&A just under the pressure of emotion, so without respecting our financial discipline, at the end we will destroy value. Sooner or later, we would pay for it. We have always said, that we are open for M&A at the right price. If we can buy something and see the return for what we buy, we will do it. We will not do something just because we feel that we have to do something.

The fact that PillPack was up for grabs was not a surprise, he adds:

We knew of course, the company was for sale. It had been for sale for a while. We have followed this company, following everything that happens in our market. To be honest as we are also working in that direction, of course one of the things that we are doing is to prepare mainly different services for our customers.

We were not particularly worried, and we are not particularly worried. Of course, we are not complacent. We know that we have to change the level of our services to the customers, and we are working quite hard on that direction, but we are not worried because at the end of the day, it's a small company.

PillPack may be small, but Amazon hardly falls under that banner, even if its footprint in the pharmacy industry isn’t large as yet. Pessina acknowledges that things could change, but insists that his business sector isn’t an easy one to break into:

It is a declaration of intent from Amazon, let's say so, but you see, the pharmacy work is much more complex than just delivering certain pills or certain packages.

The likes of Walgreen Boots Alliance and CVS also have a major asset in the shape of their offline infrastructure, says Pessina:

I strongly believe that the role of the pharmacies, the physical pharmacies, will continue to be very, very important in future….Our task is to stay relevant and as people's lives change, we must make sure we change with them. That is why we are developing our omni-channel offering and working on our plan for our U.S. stores to create hub in the communities that we serve with an attractive range of services and products. We remain convinced about the value of our presence in the community and of the strong relationship our extraordinary local teams have built in their communities.

It’s a point echoed by Alexander Gourlay, Co-Chief Operating Officer and President of Walgreens, who argues that the mix of digital and physical is the prescription that’s needed. As of today, some 22% of Walgreen’s refill scripts are initiated via digital channels, he notes:

It is a non-stop process as every improvement, however small often leads to another one. We've been improving both the capture and use of data on our businesses and our customer’s shopping habits and preferences. We're now in a strong position to start thinking about the types of services and retail offerings we want to have in our stores. Our current work on digital has also continued to be well received. Our app has now been downloaded around 52 million times. We've also recently launched Find Care Now, a digital navigator for health services under Walgreens mobile app and Find Care Now guides customers to the most convenient, cost-effective and relevant health care options in their local area provided by Walgreens and our health care partners.

This clarity of focus can bring us many benefits far beyond the improved relationship with our customers and the improvement in economic performance that typically offers. They allow us to streamline the running of our stores and the supply chain and form the structure within which we can integrate all aspects of customer contact to provide a truly omni-channel experience. It also allows us more direct management and agile decision-making and revitalizes our culture that will benefit our customers, employees and suppliers, while creating a strong yet responsive platform for future development.

His counterpart at RiteAid, Kermit Crawford, makes similar points, emphasising the relationship between customer and pharmacist as the bedrock of the business:

A great example is the successful re-launch of our award winning customer loyalty program, wellness+ rewards...Customers are responding very positively to this enhanced program, which is a simplified with an easier three step sign-up in the introduction of bonus cash… This is helping us to further build our CRM database and create opportunities for increased personalization in our direct marketing initiatives.

Additionally, our mobile app unique user base continues to grow with the number of prescription refills requested through the app increasing by 32%, compared to last year's first quarter. Our omni-channel customers are also realizing the enhancements that we have made to our e-commerce business, our wellness+ reward members enjoy all the same card benefits online and have access to an expanded assortment.

My take

The role of online in healthcare is a fascinating - and only just beginning - digital transformation use case. Face-to-face advice from a pharmacist is something that most of us welcome, I suspect. Taking guidance from a bot may be something we get comfortable with over time, but not just yet.

On the other hand, for repeat prescriptions and refills, there’s clearly an opportunity for automation to cut costs and eliminate effort, which makes the sort of service PillPack provides so valuable.

Amazon is pushing into this sector as the new kid on the block. The revenues of the likes of Walgreens Boots Alliance and CVS are streets ahead of anything sector-specific that Amazon can point to for the moment. But that ‘for the moment’ aspect is what matters in the long term.