A year after announcing it was acquiring Whole Foods Market, Amazon made a splash again, this time in the healthcare sector. On June 28, Amazon entered into an agreement to buy PillPack, an online pharmacy that offers presorted doses of medications and home delivery, for an estimated $1 billion. PillPack also has relationships with major pharmacy benefit managers, such as Express Scripts and CVS Health, that serve as gatekeepers to most Americans who are covered by health insurance. Following months of speculation about Amazon’s plans to break into the $3.5 trillion healthcare industry — amplified by the partnership it formed with Berkshire Hathaway and JP Morgan in January — this move signals another strategic step by Amazon toward disrupting the U.S. pharmaceutical market.
Rather than building its own pharmacy from the ground up, it made sense for Amazon to acquire PillPack. Positioned as “the best possible experience for customers,” PillPack’s model is entirely in line with Amazon’s mentality and proposition. The startup has reinvented the pharmacy experience not by providing home delivery, but by focusing on adherence. PillPack’s added value comes from the fact that it presorts medication by the dose into individual packets and automatically coordinates with doctors to process refills and renewals. These features are designed to improve compliance and health outcomes and lower costs, especially for patients who take multiple prescriptions for ongoing and/or chronic issues. At its core, PillPack is “designed around your life,” driven by convenience and automation, much like “the Earth’s most customer-centric company.” Additional benefits PillPack brings to Amazon are:
The deal is undervalued. PillPack has pharmacy licenses in 49 states, which makes this acquisition incredibly asset-rich due to Amazon’s unique ability to scale PillPack’s existing network. We are stunned PillPack did not get more than $1 billion for that alone.
It brings operational excellence: Amazon’s ability to build efficiencies into working streams via its outcome-first working backward approach will save consumers money. PillPack’s licensed capability to centrally distribute Rx drugs is a massive competency for Amazon. PillPack excels at providing well-thought-out solutions for pharmacists to help them balance what they are legally required to dispense with how their technology can provide a more accurate and efficient remedy for the consumer.
It could help increase Prime membership. One obvious thing most commentaries have missed is that most of the people who can benefit from PillPack are older. A cross between Rx utilization (particularly people who take multiple scripts) and Prime membership would be interesting. If this can be a Trojan horse to get older consumers into the Prime ecosystem, this will be the cheapest $1 billion ever spent.
They can’t do it alone. In 2016, PillPack announced that about one-third of its customers would no longer be able to use its free delivery service after Express Scripts terminated the relationship. Express Scripts maintained that PillPack was at fault for “misrepresenting itself” as a retail pharmacy and breaking the rules. Moving forward, PillPack/Amazon will work with businesses they are trying to disrupt (CVS/Caremark/Aetna, United/Optum, and Cigna/Express Scripts). Therefore, their scaled disruption will need to be more “surgical” than it perhaps is normally.
We do not believe the PillPack acquisition will make Amazon a competitive pharmacy player overnight. CVS and Walgreens control approximately 40% of the $305 billion U.S. prescription drug market, while Walmart, the largest retailer in the world, holds only a 5% share. However, this acquisition will enable Amazon to push the healthcare industry into focusing more on Rx compliance faster. Approximately 50% of U.S. prescriptions are either unfilled or taken inconsistently or incorrectly, a contributing factor to the Institute of Medicine statistic that 30% of total healthcare spending goes toward unnecessary, ineffective, overpriced, and wasteful services. That is $765 billion in waste alone, which is more that the U.S. spends on K-12 education.
Amazon’s PillPack acquisition is representative of how U.S. healthcare is shifting to becoming more consumer-driven. As pharmaceutical companies, OTC suppliers, healthcare providers, insurance companies, tech companies, and retailers are forced to work better together to achieve better patient outcomes, Amazon’s outcome-first approach will scale and become a new industry standard. As the U.S. healthcare industry continues to evolve, Kantar Consulting can help you contextualize the short-term investments Amazon is looking for help with and provide insights into longer-term partnerships needed to help Amazon accelerate and scale its outcome-based approach.
For more actionable insights into transformational mergers, disruption from health startups, and discussion of Amazon and other retailers moving into traditional healthcare, please attend Kantar Consulting’s Health & Wellness and Drug Channel workshops July 25 and 26 Hoboken, N.J.
For more information, please contact:
Brian Owens, Vice President (Drug)
Kate Senzamici (Drug)
Meaghan Werle, Senior Analyst (Amazon)
Bryan Gildenberg, Chief Knowledge Officer