Five Questions About Amazon’s Play for the $300 Billion Pharmacy Market
(Bloomberg) -- Amazon.com Inc. is buying its way into the pharmacy business. Now the question is, how big can it get?
PillPack, the startup pharmacy that Amazon is buying for about $1 billion, for now focuses on a narrow segment of patients who are on many different medications. It packages pills in individual packets that help people remember when to take their drugs every day, a common challenge for people taking, for example, drugs for diabetes, high cholesterol and blood pressure.
The deal is a “wake-up call” for the health-care industry that there’s a need to focus on improving the customer experience, Mark Bertolini, the chief executive officer of insurer Aetna Inc., said in an interview.
“Amazon continues to remind us that it is the consumer’s perspective that matters. It’s the consumer that disrupts industries, not companies or competitors,” Bertolini said.
Pharmacy chain CVS Health Corp. is in the midst of buying Aetna, in a bet that combining health insurance with retail pharmacies can improve care. “That is the intent of the CVS-Aetna deal, to bring more convenience, closer to home, at a higher level of quality,” the CEO said.
PillPack has the basic infrastructure that Amazon needs: mail-order pharmacy licenses in all 50 states, multiple pharmacy locations and a call center. Robert W. Baird & Co. analyst Eric Coldwell called it a “full-frontal attack” on the pharmacy sector.
“It tries to cut out two pain points -- the visit to the pharmacy and the dosing out of multiple medications,” said Kathy Hempstead, a senior adviser at the Robert Wood Johnson Foundation. “Scaling that option to Amazon’s huge distribution network could have major potential.”
Here are four key questions about the online retail giant’s plans:
1. Can Amazon scale it?
PillPack is still a niche player amid the $328.6 billion spent on retail prescriptions in the U.S. It serves a mere 40,000 customers, according to analyst reports. The big question for Amazon is how big the company can expand it, and how fast.
“We’re less than 18 months away from major disruption,” said Adam Fein, chief executive officer of the consulting firm Drug Channels Institute. “Amazon is going to be able to challenge many of the ways that pharmacy benefit managers and payers manage their networks. It’s going to be very hard to keep Amazon out.”
PillPack estimates there are tens of millions of patients taking drugs for multiple chronic conditions. The next step is to target people taking just one drug, or patients on a short course of medicine to treat an infection, for example. Acute treatments are about a third of the market, while medications for chronic care make up the rest, said Leerink Partners analyst Ana Gupte.
Amazon could also target cash-paying customers, offering cheap generic drugs to people who are uninsured or have high deductibles. That could compete with Walmart Inc.’s $4-a-prescription generic-drug program.
“I don’t see a reason that they couldn’t scale it,” said Howard Deutsch, a principal at ZS Associates, a sales and marketing consulting firm that works with health-care companies. “I can imagine a future where I say, ‘Alexa, send me the Lipitor prescription.’”
2. Will existing players in the drug supply chain fight back?
It’s highly likely.
The deal is a long-term threat to retail pharmacies such as Walgreens Boots Alliance Inc. and CVS Health Corp., which have thousands of U.S. locations -- and whose shares plunged Thursday after the deal was announced. Insurers and pharmacy-benefit managers, including Express Scripts Holding Co., steer their customers to their own mail-order businesses that PillPack could compete with.
While PillPack has agreements with all the major drug benefit managers, including Express Scripts, that could change.
“Even if PillPack is a network provider today, it does not mean it will be a network provider in the future -- especially if Amazon has designs of significantly ramping its prescription volume,” said Steven Halper, an analyst at Cantor Fitzgerald.
In 2016, Express Scripts threatened to cut PillPack out of its pharmacy network, according to news reports at the time. The two sides eventually reached a deal that let PillPack stay, though Express Scripts said their current arrangement ends next month.
“We have not reached an agreement on rates and an investigation on provider compliance is ongoing,” Brian Henry, a spokesman for Express Scripts, said Thursday. “If PillPack elects to terminate our agreement, we are committed to ensuring no gaps in care for our patients.”
3. How does PillPack fit in with Amazon’s other health plans?
Amazon is working with Berkshire Hathaway Inc. and JPMorgan Chase & Co. on a joint venture to improve health care for more than 1 million employees and family members they provide coverage for. While it’s not clear what role, if any, an Amazon prescription service would play, access to cheap mail-order drugs could provide an opportunity.
The new venture is led by surgeon and journalist Atul Gawande, who said his initiative would take aim at intermediaries in the health system as part of a broad effort to reduce wasteful spending.
“My job for them is to figure out ways that we’re going to drive better outcomes, better satisfaction with care and better cost efficiency with new models,” Gawande said over the weekend.
4. Can Amazon leverage its existing delivery network?
In theory, drugs could be shipped out with anything else Amazon already sells. It could also cut deals to give lower copays for Amazon Prime members. And with its purchase of Whole Foods last year, it has a network of brick-and-mortar locations where it could in theory locate pharmacy pickups.
The chronic-care drugs PillPack specializes in now don’t need quick delivery. But Amazon could integrate the PillPack capabilities with its own faster dropoff capabilities to "offer immediate delivery for acute care medications that are one third of the market,” said Leerink Partners’ Gupte.
CVS already delivers drugs to patients. Amy Lanctot, a spokeswoman for CVS, said the drugstore chain already has the capabilities PillPack is offering, and “we have scale in the business.”
So far, though, patients haven’t been that interested. Lanctot said CVS hasn’t seen a major shift of patients asking for medications to be delivered rather than picked up in stores.
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