Finance

Amazon’s playbook for upending healthcare just got a lot clearer — here’s why it should terrify the pharmaceutical industry (AMZN)


After more than a year of speculation, Amazon just gave a clear indication that it’s interested in getting into the pharmaceutical business.

On Thursday, it acquired PillPack, a small startup that mails prescriptions to people who take multiple medications. The news sent a whole host of pharmaceutical and drug-wholesaler stocks tumbling.

For Amazon, that clears up a couple of hurdles that had hindered its ability to get into the pharmaceutical market. PillPack’s physical pharmacy is in Manchester, New Hampshire, and the startup can ship medications anywhere in the US except for Hawaii and Puerto Rico. Amazon had applied for some wholesale pharmacy licenses in the past, but those ambitions hit a snag in December when its Maine license was canceled.

PillPack has also already figured out the logistics of how to distribute medications in complex cases where people may have multiple prescriptions.

Advertisement

Once the deal closes, Amazon could start selling prescription drugs directly through its site, delivering them via mail and affecting retail pharmacies.

In February, the Bernstein analyst Lance Wilkes laid out three possible ways Amazon could get into healthcare:

  • Amazon could purchase a pharmacy benefit manager, an organization responsible for negotiating lower prices for prescriptions.
  • Amazon could partner with another healthcare organization to be the mail-order portion of a health plan — for example, working with UnitedHealthcare’s OptumRx PBM division.
  • Amazon could also go it alone and create a mail-order system, selling that to employers that can add it to their health benefits.

The PillPack acquisition most closely aligns with the idea of Amazon going at it alone — though instead of building a mail-order system from scratch, Amazon can now theoretically just plug in PillPack.

Amazon’s joint venture with JPMorgan and Berkshire Hathaway could also lend itself to the strategy of working directly with employers. By banding these three self-insured employers together, Amazon may not have to rely on partners or acquisitions of pharmacy benefit managers for its roadmap into the prescription-drug business. Instead, Amazon could have leverage to persuade employers, starting with these three organizations, to buy into its mail service.

The approach of working with employers could put pharmacy benefit managers like Express Scripts or CVS Health in a tough spot. If employers decide to build their own transparent PBM, they might rely less on those services. National account employers make up about 21% of Express Scripts’ gross margin, according to Bernstein.

Advertisement

Wholesalers, which are in charge of shipping drugs to pharmacies and hospitals, have been feeling the effects of Amazon’s Thursday announcement — the three largest wholesalers, Cardinal Health, AmerisourceBergen, and McKesson, all fell by more than 5%. While PillPack isn’t a wholesaler, that’s something Amazon, with its distribution expertise, could tackle next. These companies could face direct competition from Amazon if it chooses to distribute prescription drugs.

And if Amazon, with the help of PillPack, can send along prescriptions in the mail directly to people, it could mean a lot less foot traffic for brick-and-mortar pharmacies, hurting the retail pharmacy business.

Robert Handfield, a professor of supply-chain management at North Carolina State University, told Business Insider in October that the amount of money that prescriptions bring into pharmacies isn’t all that much. What makes pharmacies a booming business is what else people buy there — things like snacks, drinks, or beauty products.

Say that prescription portion went online — it would be much harder for retail pharmacies to compete with convenience stores, grocery stores, and anyone else selling things like candy bars and deodorant, much of which Amazon is already selling.

Earlier this month, CVS announced plans to offer a delivery service for prescriptions, a move that could buffer some of the effects of Amazon’s push.

Advertisement

“PillPack’s visionary team has a combination of deep pharmacy experience and a focus on technology,” Jeff Wilke, Amazon’s CEO of worldwide consumer, said in a release. “PillPack is meaningfully improving its customers’ lives, and we want to help them continue making it easy for people to save time, simplify their lives, and feel healthier.”

While it remains to be seen how that will play out, one thing’s clear: With Amazon officially in the game, the pharmaceutical industry is in for a shakeup.

Now tell us what you think!

Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Most Popular

To Top