June 29, 2018

Amazon seeks to acquire PillPack, and industry stocks are quaking

Daily Briefing

    Amazon on Thursday announced that it has entered a merger agreement to acquire the online pharmacy PillPack—a move some observers say could increase competition for companies in the drug supply chain.

    The executive's guide to all things pharmacy

    Merger agreement details

    Individuals familiar with the merger agreement said Amazon will purchase PillPack for about $1 billion in cash. PillPack is a Boston-based company that presorts and delivers prescriptions to customers in every U.S. state except Hawaii. PillPack, which said it generated more than $100 million in revenue in 2017, also coordinates refills and renewals.

    According to the Amazon release, "PillPack holds pharmacy licenses in all 50 states, has URAC and [Verified Internet Pharmacy Practice Sites] accreditation, [and] is an in-network pharmacy with most [pharmacy benefit manages (PBMs)], including major Medicare Part D plans."

    Sources said PillPack had been engaged in merger talks with Walmart, but Walmart had been slow to make a final offer to PillPack. Ultimately, Amazon outbid Walmart to acquire all of PillPack's operating licenses and software, Vox reports.

    Amazon in a release said its merger agreement with PillPack is subject to regulatory approvals and other closing conditions. Amazon and PillPack except to finalize the transaction during the second half of 2018.

    PillPack Co-Founder T.J. Parker in a release said, "Together with Amazon, we are eager to continue working with partners across the health care industry to help people throughout the U.S. who can benefit from a better pharmacy experience."

    Some say deal will 'disrupt' the Rx drug industry

    Advisory Board's Brandi Greenberg believes the move signals Amazon's interest in targeting complex, high-spending patients.

    "What we shouldn't overlook is what this deal tells us about Amazon's strategy for building its patient base," Greenberg said. "By partnering with PillPack, Amazon is building relationships with patients that have complex, often chronic conditions— the same patients who spend a lot of money on health care over long periods of time, who need other kinds of care management services, and who are likely to be a key source of adherence and population health data."

    Greenberg added, "The deal may not just signal Amazon’s interest in disrupting distribution channels; it may also signal their interest in using PillPack as a stepping stone to a more comprehensive suite of services that target our highest-spending patient populations."

    The merger agreement is Amazon's latest move to enter the health care industry, the Wall Street Journal reports. If the merger is approved, Amazon is expected to become a "direct threat" in the more than $400 billion pharmacy business, which includes drug chains and retailers, according to the Journal. The merger would mean Amazon could compete in the pharmacy industry without building its own in-house capabilities like other players—such as CVS Health and Walmart—have done. In addition, Amazon's presence in the market could increase competition for drug wholesalers such as Cardinal Health and McKesson, which typically have low margins.

    Eric Coldwell, an analyst at Baird, in a note to investors wrote, "While Amazon's focus and interest in pharmacy to date has been somewhat cloudy, [Wall] Street will see this as a full-frontal attack." Coldwell added that members of the drug supply chain could be "crushed" by Amazon's entrance into the pharmaceutical industry.

    Others say the deal won't change much

    However, others have said it might be difficult for Amazon to disrupt the pharmacy industry because the industry is extremely regulated and involves contracts, interconnected data systems, and relationships with health plans, PBMs, and other health care industry members, the Journal reports.

    Raymond James & Associates in a note to investors wrote that PillPack specializes in packaging a one-month-supply of pills for patients with chronic diseases, which represents a small portion of the pharmacy market that "has never achieved much retail share."

    Ann Hynes, an analyst at Mizuho Securities USA, said PillPack has "roughly 40,000 customers today." Hynes added, "It is important to note PillPack is not an innovative offering. We confirmed with CVS that the company has a similar offering and they have not experienced a major shift of patients to this service."

    Industry reacts

    After news of the merger agreement between Amazon and PillPack broke, the stock shares of pharmacies and other companies in the drug supply chain—including CVS, Express Scripts, and Walgreens—dropped, the Post reports.

    According to CNBC, drug store chains Walgreens Boots Alliance, CVS, and Rite Aid—as well as drug distributors Cardinal Health, AmerisourceBergen, and McKesson—lost a combined $14.5 billion in market value Thursday.

    Walgreens CEO Stefano Pessina said Walgreens is "not particularly worried" about the merger agreement, adding that Walgreens is "not complacent," but "the pharmacy world is much more complex than just delivering certain pills or packages." Pessina said, "I strongly believe that the role of the physical pharmacy will continue to be very, very important in the future."

    A CVS spokesperson said, "We believe that we are well-positioned in the market and ahead in this area," because the company already offers patients multi-dose packaging that they either can either pick up at a local pharmacy or have delivered. For instance, CVS earlier this year reached an agreement with the U.S. Postal Service to transport prescriptions from CVS stores to customers' homes in one or two days, the Journal reports. CVS' spokesperson said, "We have not seen a large shift of patients that are looking for their medications to be delivered versus coming to a retail pharmacy" (Terlep/Stevens, Wall Street Journal, 6/28; Scott, Vox, 6/28; Langreth/Tracer, Bloomberg, 6/28; Farr, CNBC, 6/28; Johnson, "Wonkblog," Washington Post, 6/28; Ross, STAT News, 6/28; Japsen, Forbes, 6/28; Amazon release, 6/28; LaVito, CNBC, 6/29).

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