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May 20, 2019

The $753M question: What's Amazon got planned for PillPack?

Daily Briefing

    In June 2018, Amazon announced that it was purchasing PillPack, a mail-order pharmaceutical supplier. Writing for CNBC, Christina Farr examines why Amazon made the deal and what plans it has for PillPack going forward.

    June 5 webconference: What 'Amazon health care' could look like in 5 years

    About PillPack

    PillPack is a direct-to-consumer pharmacy business that organizes, packages, and distributes prescription drugs for its clients, especially targeting those with multiple chronic conditions.

    As explained by a page that Amazon set up to explain the service to its Prime members, PillPack will "sort your meds by date and time," sealing them in individual envelopes labeled, for instance, "8:00 AM Monday." The idea is to make it easier for patients with multiple chronic conditions to take each medication as scheduled.

    PillPack was courted last year by several would-be buyers, including Walmart and Novartis, but Amazon eventually won out and purchased the company for a reported $753 million.

    At the time of the acquisition, CNBC reported that PillPack had driven $100 million in revenue in 2017.

    Potential challenges for PillPack and Amazon

    But many questions remain about how Amazon will utilize PillPack going forward, Farr reports.

    PillPack is a "very low-margin business," according to Farr, which means that Amazon is counting on the company's high growth prospects to justify its investment. But it's not yet clear where future growth will come from.

    One approach would be for PillPack to build relationships with the pharmacy benefit managers (PBMs) such as Express Scripts and Caremark that provide pharmacy services for most insured Americans. Doing so would be one of the only ways for the company to reach consumers who get their medication through insurance. But PBMs have viewed PillPack as a threat, as "many [PBMs] offer their own lucrative mail-order services," Farr writes. 

    There's already a history of a contentious relationship between Pillpack and a major PBM. In 2016, Express Scripts, the country's largest PBM, threatened to remove PillPack from its network as it claimed the company was misrepresenting itself in the market by serving more as a retail pharmacy than mail-delivery service. While they eventually stepped down and agreed to provide a mail-order contact to PillPack, the company had to admit to an "administrative error" in shipping to states where it didn't have the proper licenses.

    Additionally, PBMs have long worried that Amazon could choose to enter the business of pharmaceutical distribution—challenging another aspect of the PBM business model, Farr writes.

    Yumin Choi, a health-tech investor at Bain Capital Ventures, said, "Amazon bought the one company in the space that all the PBMs and other pharmacy businesses were threatened by. The challenge is now they put a stake in the ground and the flag has been planted."

    Amazon and PillPack may want to create a better experience for consumer in getting their medicines, but, to do so, they'll have to navigate the disjointed system of physicians, insurance companies, and medical records providers that drive the pharmaceutical market, Farr reports. And that won't be easy: As Eric Percher, an equity analyst covering the pharmacy supply chain at Nephron Research, said, "There's a lot that's not under [Amazon's] control."

    He added that it's unclear if Amazon can change how "the patient interacts with the pharmacy supply chain and the payor."

    What PillPack's future could hold

    Despite these challenges, Amazon is aggressively exploring opportunities to expand PillPack's market, Farr reports.

    According to confidential documents, Blue Cross Blue Shield (BCBS) has reached out about providing PillPack's mail-delivery services to BCBS members, Farr writes, although no deal has been reached as of yet.  BCBS declined CNBC's request for comment.

    Meanwhile, PillPack's focus is growing and hiring, Farr writes. Amazon is hiring pharmacists and pharmacy technicians and currently has about 50 job openings for PillPack on its careers website, including openings for a packing and shipping specialist, visual designer, and many software development positions.

    PillPack has also increased its ad spending on TV stations and digital platforms, such as Facebook. In addition, the company is moving forward with plans to establish a 175,000-square-foot pharmacy operation in Phoenix to serve as both a retail pharmacy and distribution center, Farr writes.

    And in Arizona, PillPack has begun lobbying local officials to allow pharmacy technicians to transfer medications from other pharmacies into PillPack, Farr writes. Currently, state law requires pharmacists to handle transfers that come in via phone.

    Amazon's health care aspirations beyond PillPack

    PillPack is far from Amazon's only move in the health care industry, Farr writes. For instance, the company is working with J.P. Morgan Chase and Berkshire Hathaway on Haven, a joint venture aimed at improving care and bringing down health care costs. In addition, Amazon is planning on opening its own health clinics for employees.

    Amazon is also incorporating health care skills into its Alexa voice-assistant technology, and the company has a secret group called Grand Challenge that's working on telemedicine and applying machine learning to cancer research, Farr writes.

    However, despite these forays, Amazon doesn't appear to have a "grand plan" for health care, Farr writes. At a recent investment bank event, PillPack co-founder and product chief Elliot Cohen said that there is no single individual at Amazon's headquarters who's charged with overseeing Amazon's health ventures (Farr, CNBC, 5/10).

    June 5 webconference: Learn more about PillPack and Amazon's retail pharmacy strategy

    Amazon is moving into health care— and even the potential of its disruption is catalyzing change. Join us on Wednesday, June 5 at 3 pm ET to learn more about its strategy in the retail pharmacy space and the four other main industry areas they're targeting. We'll outline what you should know and how your organization can prepare.

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