Amazon Disrupts Retail Health With PillPack Deal

Source: John O'Leary, Friday, Jun 29, 2018

Amazon became a key competitor to drug stores and a major player in retail health with the acquisition of PillPack, subject to regulatory approval. PillPack, founded in 2013, is an online pharmacy that organises prescription medications and vitamins into easy-to-use daily packets and delivers them to customers’ homes.

Users of the service receive their organised medication on a monthly basis, have access to 24/7 customer service, and can use an innovative mobile application that helps them manage their medicine needs.

Amazon’s most extensive move in healthcare to date

Healthcare is viewed as a critical industry vertical to Amazon. With ageing baby boomers, a rapidly evolving insurance regulatory environment, and ballooning costs, healthcare is one of the fastest growing portions of US consumer spending. The latest WHO data shows US out-of-pocket spending on healthcare declining in percentage terms but rising in dollar terms as healthcare costs spiral upwards.

Amazon is looking to position itself to take advantage of these drivers, with recent healthcare initiatives like:

When the licensing news emerged, Amazon quickly distanced itself from the idea it would be selling prescription drugs to consumers anytime soon. Outside of the extensive state-by-state licensing requirements, dispensing pharmaceuticals also requires significant expertise and carries with it a high amount of liability. With its acquisition of PillPack, Amazon overcomes these challenges and more.

PillPack as an “acqui-hire

Amazon is best known for opting to build capabilities itself versus acquiring them, whenever possible. It generally will only acquire companies to enter unknown geographies, bring in new tech, or add expertise in difficult categories.

With PillPack, Amazon gains pharmaceutical distribution licenses in all 50 states. The company also has pharmacist headcount to administer medication, the innovative sorting and packaging technology for the pills, the necessary billing programmes and relationships with insurance companies, and the “Pharmacy OS” system for tracking patient data and managing safe doses.

In one fell swoop, Amazon is up and running as an online pharmacy, and, by retaining PillPack senior leadership, will be well positioned to navigate the complexities of the space as they scale the business.

Evolving the US healthcare experience

Amazon will provide the necessary capital to scale the PillPack offering more broadly, with a key focus of growth through new customer acquisition. Amazon will look to lower wholesale costs to PillPack for drugs, perhaps leveraging its Berkshire/JP Morgan partnership. Other quick wins include:

  • Offering Amazon own-brand OTC medication and vitamins as part of packs
  • Integrating Alexa into the PillPack customer service interface

Though no one in the industry has effectively accomplished this to date, Amazon’s data-enabled understanding of its consumers could also marry prescription needs with other related health purchases in categories like OTC and food to create a more holistic health solution.

Suppliers should prepare for Amazon’s share gains in health categories

The immediate threats are to traditional drugstore players, CVS and Walgreens, who will see declining share if Amazon realises its aspirations in healthcare. Drug suppliers (both prescription and OTC) must be prepared to resource Amazon as a key customer going forward.


RECOMMENDATIONS FOR SUPPLIERS

  • Because PillPack is a subscription programme that that is automatically reordered, displacing existing brands with new drugs or supplements will be extremely difficult. As the programme grows, suppliers should prioritise being selected in the customer’s initial basket-building process.
  • Amazon will be guarded about sharing new data, and will also look to drive lower prices by pushing back on supplier partners . Brands that sell in health-related categories must make greater data sharing part of their annual negotiations.
  • As PillPack is likely to initially gain greater traction with consumers that have chronic health needs and are less mobile, suppliers should devise targeted strategies around these customers first.