why Amazon bought Pillpack

Bezos, the drug dealer

If you were wondering whether Amazon was going to get into healthcare, you now have your answer. The company acquired mail-order pharmacy Pillpack for just under $1B and also appointed Atul Gawande to lead the Amazon-Berkshire-JPM intiative.

We have some thoughts, which we’ll be talking about in our “Amazon in Healthcare” briefing on July 17th.

Wall Street had some thoughts more immediately.

Executives had their own.

It’s clear that the retail pharmacy world is going to have to evolve past distributing commodity products. We’re seeing this with the expansion of retail clinics and the shift of high-margin, high-volume, relatively low-risk tests moving to these pharmacies (as we talked about in our Consumerization of Healthcare research brief).

OR Walgreens can take some of its consumer experience notes from Rite Aid, I guess.

I wanna be a pillionaire, so freakin’ bad

A near billion dollar exit for PillPack makes it one of the biggest exits for the digital health space (you can see some the rest with this search).

Sure, Amazon gets a company with a $100M in revenue, a built out mail-order pharmacy logistics operation, and associated services (medication management, etc.).

But the company is actually buying PillPack’s licenses to distribute in all 50 states, accelerating the time it takes for Amazon to go to market.

And Amazon can use this acquisition to start with a (relatively) small group of people willing to pay cold hard cash for their medicines. This area is perfect for Amazon since the big players are making solid margins and the spread of prices for the same drug are incredibly high. Some transparency would do this some good.

Two missing pieces

However, to make this a truly effective solution, Amazon would need two more parts IMO. The first is a pharmacy benefits manager (PBM), which is essentially how drugs get paid for today. Amazon either needs to build or buy the other functions PBMs currently do if it wants to actually own drug distribution. Pillpack already works with the major PBMs, but it’s currently at their mercy.

The timing is also interesting, since Express Scripts (a PBM) is in the process of being bought and is in another public tussle with another online pharmacy CareZone. The combination of insurers owning the biggest PBMs (which might make other insurance carriers wary) AND Express Scripts having such massive control over the destiny of smaller pharmacies might open Amazon to the opportunity of a PBM alternative.

The second thing Amazon needs is a retail pharmacy to handle patients with more immediate needs. PillPack is great for recurring and predictable patients that it can anticipate the demand for a couple of days in advance. But for patients that need something same day, Amazon needs to give customers access to retail pharmacies. Through the process of building/buying a PBM, it could build a network of smaller retail pharmacies to address this need. Or, Amazon could bring the pharmacies in their Whole Foods stores.

You may be wondering how this would differ from the existing PBMs. The running thread of tech giants entering healthcare is the fact that they make revenue from areas beyond healthcare. This enables them to be transparent about cost savings being passed on to customers, as they don’t need to make their entire business about taking $$ directly through this process — instead, they can make money indirectly through other parts of their business like Prime.

“Your margin is my opportunity.”

Global Hubbub

The Pillpack exit is also a win for Boston, which has seen its equity deals plateau recently, as we examined in our new Global Tech Hubs Report.

To see the full report with the up-and-coming tech metros, read it here.

Stay healthy,

Nikhil
@nikillinit