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Amazon jumps into drug business with PillPack buy

If the e-commerce giant can break people's habit of buying their prescriptions from physical pharmacies, it will upend the industry

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Amazon's purchase of PillPack is the latest sign of the tech giant's growing interest in health care.

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PillPack is an online pharmacy that sorts customers' medication by the dose.

IN the world of health care, online pharmacy PillPack is a pretty small player. Its workforce of 1,000 or so people pales in comparison with the 235,000 who work for Walgreens.

But when Amazon announced on Thursday that it was buying PillPack, the deal immediately shook the industry. Shares of Walgreens and Rite Aid tumbled more than 9 per cent, while CVS Health dropped 6.6 per cent.

That is because with one move, Amazon answered the question about when - and how - it would grab a piece of the US$560 billion prescription drug industry. It was precisely the sort of deal that the health care industry had feared.

Amazon has been hinting at its interest in selling drugs, but it faced the problem of securing pharmacy licences in each state. PillPack will help overcome that hurdle, since the startup is licensed to ship drugs in 50 states - clearing the way for the e-commerce giant to quickly become a major player in the business.

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And it will be doing so without much financial stress. Amazon, which has a market value of over US$840 billion, is paying about US$1 billion for the startup, said one person briefed on the deal, but who was not authorised to speak about it publicly. Amazon beat out Walmart for the company, this source said.

Jeff Wilke, Amazon's chief executive of its consumer business, said in a statement: "PillPack's visionary team has a combination of deep pharmacy experience and a focus on technology. We're excited to see what we can do together on behalf of customers over time."

Anxiety over what Amazon might do in health care has unsettled the industry. The company's interest in drugs has been considered a factor in a wave of recently proposed mergers, including CVS' acquisition of Aetna and a union between the health insurer Cigna and Express Scripts, the pharmacy benefit manager. Amazon's entry could make it easier for some of those deals to get approval from regulators, by having added a new competitor.

Last fall, perhaps in a move to get ahead of Amazon, CVS announced it would offer next-day delivery of prescription drugs and same-day service in some big cities.

Five-year-old PillPack distributes pills in easy-to-use packages designed for consumers with chronic conditions and multiple prescriptions. The company sorts prescriptions by the dose and includes a label with a picture of each pill and directions on how it should be taken.

T J Parker, a pharmacist, and Elliot Cohen, an engineer, founded the startup. The company's primary pharmacy is in Manchester, New Hampshire, but also has numerous other pharmacies, including in Miami, Brooklyn and Austin. It has the licence to deliver drugs in all 50 states, but does not ship to Hawaii for now.

Potential target

PillPack has raised US$118 million in funding, with investors including Accel Partners, Atlas Venture, CRV, Founder Collective, Menlo Ventures, Sherpa Ventures and Techstars. It is not necessarily a major player in the pharmacy world, bringing in about US$100 million in revenue in 2017, said the company. But PillPack has long been seen as a potential target for larger businesses looking at online drug sales.

Its national reach made it an attractive prospect for Amazon, said Adam J. Fein, chief executive of the Drug Channels Institute.

After early tussles with pharmacy-benefit managers like Express Scripts, PillPack also managed to work with major benefit managers and insurers, not an easy feat for an online pharmacy that directly competes with many of those companies' mail-order businesses.

Even as Americans have shifted their buying habits online, prescription drugs have remained a stubbornly brick-and-mortar purchase. About 90 per cent of all prescriptions are filled at a pharmacy counter, said Iqvia, a research firm.

If Amazon can break that habit, it could upend the industry, as people can buy everything from Amazon.

Stefano Pessina, chief executive of Walgreens Boots Alliance, has said he is unconcerned about Amazon's acquisition. He said the physical pharmacy would remain important to customers in the future. "We are not complacent. We know we have to change the level of our service to the customers, and we are working in that direction, but we are not worried," he said.

Offering an option

Carolyn Castel, a CVS Health spokesman, said her company had the same abilities as PillPack, but many more customers. "Keep in mind that we have not seen a large shift of patients that are looking for their medications to be delivered versus coming to a retail pharmacy," she wrote in an e-mail. "And for those patients that do desire to transition, we offer the option."

Independent online pharmacies have had a tough time because consumers who do buy their prescriptions through mail order are often required to do so by their insurance plans. Pharmacy benefit managers have traditionally offered employers and insurers incentives requiring that long-term prescriptions be filled through the managers' mail-order pharmacies.

With short-term prescriptions like antibiotics, many consumers prefer their corner drugstore, since they often need to fill those drugs right away. About 85 per cent of prescriptions in the US are for refills, said Iqvia.

But Stephen Buck, a pharmaceutical supply-chain expert who co-founded the drug-price website GoodRx, along with others, said Amazon might have a new opportunity. More Americans are without health insurance or have such high deductibles that they may be better off bargain shopping on their own. He estimated that 25 million Americans are in this category.

Until now, he said, PillPack has not aggressively competed on price. With Amazon in charge, it could start doing so, he suggested.

The deal for PillPack could be just one piece in Amazon's broader health ambitions.

In January, Amazon, Berkshire Hathaway and JPMorgan Chase & Co announced plans to form an independent health care company for their employees in the US, in what could become an incubator for new ideas. Amazon has also pushed to expand its medical supplies business, seeking to become a major supplier for hospitals and outpatient clinics.

The company tried to enter the pharmaceutical world in 1999 by purchasing 40 per cent of Drugstore.com but it ran into logistical and regulatory challenges, which derailed the effort.

John Sculley, a former chief executive of Apple and the chief marketing officer of RxAdvance, a pharmacy benefit manager, said PillPack was a natural choice for Amazon: "This one plays right into everything they know how to do," he said. "It's in their wheelhouse." NYTIMES