Amazon to Buy Online Pharmacy PillPack, Jumping Into the Drug Business
Posted June 28, 2018 7:57 p.m. EDT
In the world of health care, PillPack, an online pharmacy, is a pretty small player. Its workforce of 1,000 or so people pales in comparison with the 235,000 who work for Walgreens.
But when Amazon announced Thursday that it was buying PillPack, the deal immediately shook the industry. Shares of Walgreens and Rite Aid tumbled more than 9 percent, while CVS Health dropped 6.6 percent.
That is because with one move, Amazon answered the question about when — and how — it would grab a piece of the $560 billion prescription drug industry.
It was precisely the sort of deal that the health care industry had feared.
Amazon has been hinting at its interest in selling drugs, but it faced the problem of securing pharmacy licenses in each state. PillPack will help overcome that hurdle, since the startup is licensed to ship drugs in 50 states — clearing the way for the e-commerce giant to quickly become a major player in the business.
And it will be doing so without much financial stress. Amazon, which has a market value of over $840 billion, is paying about $1 billion for the startup, according to one person briefed on the deal, who was not authorized to speak about it publicly. Amazon beat out Walmart for the company, the person said.
“PillPack’s visionary team has a combination of deep pharmacy experience and a focus on technology,” Jeff Wilke, Amazon’s chief executive of its consumer business, said in a statement. “We’re excited to see what we can do together on behalf of customers over time.”
Anxiety over what Amazon might do in health care has unsettled the industry. The company’s interest in drugs has been considered a factor in a wave of recently proposed mergers, including CVS’ acquisition of Aetna and a union between the health insurer Cigna and Express Scripts, the pharmacy benefit manager. Amazon’s entry could make it easier for some of those deals to get approval from regulators, by adding a new competitor.
Last fall, perhaps in a move to get ahead of Amazon, CVS announced it would offer next-day delivery of prescription drugs and same-day service in some big cities. The next-day delivery began this month, for a fee of $4.99.
PillPack, which started in 2013, distributes pills in easy-to-use packages designed for consumers with chronic conditions and multiple prescriptions. The company sorts prescriptions by the dose and includes a label with a picture of each pill and directions on how it should be taken.
TJ Parker, a pharmacist, and Elliot Cohen, an engineer, founded the startup after meeting through a health care innovation program at the Massachusetts Institute of Technology. The company’s primary pharmacy is in Manchester, New Hampshire, but it also has numerous other pharmacies, including in Miami; Brooklyn, New York;,and Austin, Texas. While it has licenses to deliver drugs in all 50 states, it does not now ship to Hawaii.
It has raised $118 million in funding, with investors including Accel Partners, Atlas Venture, CRV, Founder Collective, Menlo Ventures, Sherpa Ventures and Techstars.
It is not necessarily a major player in the pharmacy world, bringing in about $100 million in revenue in 2017, according to the company. But PillPack has long been seen as a potential target for larger businesses looking at online drug sales.
Its national reach made it an attractive prospect for Amazon, said Adam J. Fein, chief executive of the Drug Channels Institute, who studies the industry.
After early tussles with pharmacy-benefit managers like Express Scripts, PillPack also managed to work with major benefit managers and insurers, not an easy feat for an online pharmacy that directly competes with many of those companies’ mail-order businesses.
“It’s a turnkey mail pharmacy operation,” Fein said.
Even as Americans have shifted their buying habits online, prescription drugs have remained a stubbornly brick-and-mortar purchase. About 90 percent of all prescriptions are filled at a pharmacy counter, according to Iqvia, a research firm.
If Amazon can break that habit, it could upend the industry. “It helps people to eliminate that trip and buy everything they need from Amazon,” said Stephen Buck, a pharmaceutical supply-chain expert who co-founded the drug-price website GoodRx.
In a call with investors Thursday, Stefano Pessina, chief executive officer of Walgreens Boots Alliance, said he was not concerned about Amazon’s acquisition. He said the physical pharmacy would remain important to customers in the future.
“We are not complacent, we know we have to change the level of our services to the customers, and we are working in that direction, but we are not worried,” he said.
Carolyn Castel, a spokeswoman at CVS Health, said her company had the same abilities as PillPack, with many more existing customers.
“Keep in mind that we have not seen a large shift of patients that are looking for their medications to be delivered versus coming to a retail pharmacy,” she wrote in an email. “And for those patients that do desire to transition, we offer the option.”
Independent online pharmacies have had a tough time because consumers who do buy their prescriptions through mail order are often required to do so by their insurance plans. Pharmacy benefit managers have traditionally offered employers and insurers incentives requiring that long-term prescriptions be filled through the managers’ own mail-order pharmacies.
And for short-term prescriptions, like antibiotics, many consumers prefer their corner drugstore, since they often need to fill those drugs right away. About 85 percent of prescriptions in the United States are for refills, according to Iqvia.
But Buck and others said Amazon might have a new opportunity. A growing number of Americans are without health insurance or have such high deductibles that they may be better off bargain shopping on their own. He estimated that 25 million Americans fell into that category.
Until now, he said, PillPack has not aggressively competed on price. With Amazon in charge, “how about they start posting prices that are really, really aggressive?” Buck said. The deal for PillPack could be just one piece in Amazon’s broader health ambitions.
In January, Amazon, Berkshire Hathaway and JPMorgan Chase & Co. announced plans to form an independent health care company for their employees in the United States, in what could become an incubator for new ideas. Last week, the companies said Dr. Atul Gawande, a Harvard surgeon and staff writer for The New Yorker, would become chief executive of the business.
Amazon has also pushed to expand its medical supplies business, seeking to become a major supplier for hospitals and outpatient clinics. It received wholesale pharmacy licenses from several states this year that permit it to start selling medical equipment to businesses. Its products could be used to supply operating and emergency rooms, along with outpatient locations.
The company previously tried to enter the pharmaceutical world in 1999 by purchasing 40 percent of Drugstore.com. However, it ran into logistical and regulatory challenges that ultimately derailed the effort.
John Sculley, a former chief executive of Apple and the chief marketing officer of RxAdvance, a pharmacy benefit manager, said PillPack was a natural choice for Amazon.
“This one plays right into everything they know how to do,” he said. “It’s in their wheelhouse.”