Amazon.com (AMZN) Buys PillPack: Who Wins, Who Loses?

West Palm Beach, USA - June 30, 2016: Amazon packing tape on Amazon.com shipping boxes. One box is taped with Amazon Prime tape and the other has Amazon with the smiling arrow design.

(Image credit: NoDerog)

Any doubt that e-commerce giant Amazon.com (AMZN, $1,701.45) was serious about getting into the pharmacy business was wiped away Thursday, June 28. That’s when Amazon announced it is buying mail-order/online pharmacy PillPack.

PillPack, which bills itself as a “new kind of pharmacy,” doesn’t appear much different than any other online pharmacy at first blush. Prescription submissions are handled online, and the company works with caregivers and insurers, making for a mostly seamless experience. But PillPack stands out in one simple way that is indeed Amazon-like. The company repackages and prepackages medications by the day, allowing users to open just one daily package that may contain several different medicines. Users find this approach much easier to manage, allowing them to take the right pills at the right time.

For this nuanced advantage, Amazon reportedly was willing to shell out roughly $1 billion to acquire PillPack, though neither company has cited a specific buyout figure.

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If all goes well, though, $1 billion could be a relative bargain – in a certain sense of the word.

The Right Time for the Pairing

Whispers of such a maneuver have been circulating for years, though the volume was turned up in May 2017, largely in conjunction with Amazon’s acquisition of grocer Whole Foods Market. If it was willing to make a foray into brick-and-mortar food, another e-commerce line would be easy by comparison.

The company took an unexpected left turn in January. Amazon teamed up with Warren Buffett’s Berkshire Hathaway (BRK.B) and mega-bank JPMorgan Chase (JPM) to create a healthcare consortium intended to benefit employees of the three massive companies. Details were and still are scant, but it appears the joint effort would serve as a means of self-insurance that could take a bite out of each company’s costs of offering health benefits to their workers.

For a short while, the development led people to believe Amazon.com CEO Jeff Bezos had abandoned the idea of cultivating his own online pharmacy. Now it’s clear he was only biding his time.

It’s a brilliant move, for several reasons.

One is simply that now is the right time for such a shakeup. Rising healthcare costs – and rising prescription costs in particular – are nothing new. But in recent years, healthcare has become outright unaffordable. As of 2017 the average cost of health insurance for a family rolled in at an eye-popping $18,674 per year, up more than 50% from 2007’s $12,106; rising deductibles add to the burden. The steep increase in premiums simply reflect the increased costs of delivering the healthcare and medications that insurance provides.

Consumers are hungry for solutions.

As Michael Rea, CEO and Founder of Rx Savings Solutions, succinctly noted, “America’s drug pricing problem is in need of fixing.” Rea added that the Amazon-PillPack tie-up, which would have seemed unusual not that long ago, “signals just how big of a market opportunity there is to change the pharmacy landscape.”

Even if burgeoning costs hadn’t left the pharmacy business vulnerable to a shakeup, however, the melding of PillPack and Amazon may have been inevitable.

The Shape of Things to Come

At its inception, Amazon.com was primarily a seller of books and other media. The addition of other goods, including electronics, was a logical extension of the business model, and the convenience it offered caught on quickly.

The idea that Amazon.com has become a lifestyle company, however, is a relatively new one.

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Consumers now talk to Amazon via their at-home Echo speakers. The e-commerce giant is as much a provider of digital entertainment as it is a shopping venue. People don’t think twice about the fact that they’re ordering groceries online. Amazon is the centerpiece of all of that (and more), yet most consumers don’t give its role as a life-living hub a second thought. The addition of pharmaceuticals to that mix could prove a relatively small leap.

“PillPack is highly complementary to the Amazon ethos,” explains Nathan Ray, senior principal of healthcare and life sciences at business and technology consulting firm West Monroe Partners. “I see this as more of a sign of the direction of healthcare versus a mail-order pharmacy buy for Amazon.”

The creation of a home-grown care solution shared with Berkshire and JPMorgan also suggests healthcare is moving in this direction, where unlikely – even awkward – partnerships take shape.

Amazon brings something else to the table, too – something PillPack needs, and something that could prove devastating to rivals such as Walgreens (WBA), CVS Health (CVS) and even Walmart (WMT), which had its own chance to acquire PillPack: customers. Amazon boasts more than 300 million users, over 100 million of which are highly active Prime members, known to spend considerably more than non-Prime members.

While PillPack has built a respectable business in its own right, it only has “tens of thousands of customers” on board, and was only on pace to drive about $100 million worth of revenue this year. Amazon might significantly enhance those numbers with just the gentlest of nudges if it masters the nuances of market pharmacy services.

More customers doesn’t necessarily mean more profit, however … if that’s the end-goal.

Hurdles Ahead

Not every onlooker believes the union of PillPack and Amazon will be a disruptive force. Mizuho analyst Ann Hynes says the acquisition’s “bark is likely worse than its bite, at least initially.” She also says, “We confirmed with CVS that the company has a similar offering (repackaging multiple prescriptions into one daily packet) and they have not experienced a major shift of patients to this service.”

A CVS spokesperson concurred, saying, “We have not seen a large shift of patients that are looking for their medications to be delivered versus coming to a retail pharmacy.”

That’s a red flag suggesting this market may not be ready for a massive upside explosion, even in Amazon’s hands.

Walgreens CEO Stefano Pessina pointed out during its earnings call that Amazon has “opportunities around the world and in other categories, which are much, much simpler than health care, which is a very regulated business.” He added, “The pharmacy world is much more complex than just delivering certain (pills or) packages.”

He’s not wrong, even if it’s a self-serving suggestion. Licensing alone is a monster headache exacerbated by combining multiple medications into multiple packets, underscored by the liability of passing them along to customers they never actually see in person.

Then there’s the hurdle few others have yet to entertain: The distinct possibility that this is where consumers will finally draw a line.

They love Amazon’s logistical prowess, and the fact that it can supply anything, much of it in less than 24 hours. Some consumers will even let Amazon’s delivery drivers into their houses.

They may just balk, however, when it comes to letting Amazon take a snapshot of their health problems.

Maybe.

Who Wins, Who Loses?

Much like the upside of bringing Whole Foods into the Amazon fold, the upside of adding PillPack to the mix remains unclear. The only assessment that can be offered with any certainty is, “it depends.” It depends on whether rivals join forces, whether Amazon is willing to ensure it wins the brewing price war, and how much Amazon can (or even will) co-market the online pharmacy, though there’s no doubt it has plenty of marketing firepower.

Investors who can be intellectually honest about the matter must recognize that Amazon is in a far better position to win a price war. It’s in a far better position to cross-sell such a service than other online pharmacies. There are no other retailer/pharmacy combinations that could create an equivalently powerful threat to the industry.

Profits? Amazon.com has an advantage in that regard, too. Its shareholders have proven they’re comfortable with booking losses now in the name of casting an ever-widening net that pulls people into the ecosystem. PillPack widens that net, even if it saps the bottom line … much like the Whole Foods deal has thus far.

Amazon may not “win” with PillPack in a direct sense, but the rest of the pharmacy industry will certainly lose. It’s just a question of how well it can keep that loss in check.

James Brumley is a former stock broker, registered investment adviser and Director of Research for an options-focused newsletter. He's now primarily a freelance writer, tapping more than a decade's worth of broad experience to help investors get more out of the market. With a background in technical analysis as well as fundamental analysis, James touts stock-picking strategies that combine the importance of company performance with the power of stock-trade timing. He believes this dual approach is the only way an investor has a shot at consistently beating the market. James' work has appeared at several websites including Street Authority, Motley Fool, Kapitall and Investopedia. When not writing as a journalist, James works on his book explaining his multi-pronged approach to investing.