Amazon Face Challenges After PillPack Acquisition

Amazon might not have announced plans to open a chain of hospitals (yet), but you can forgive people for letting their imaginations go there in recent days, after the eCommerce operator bought five-year-old pharmacy delivery company PillPack.

The deal, announced last week, came after well-regarded surgeon and author Atul Gawande was named CEO of the new healthcare company formed by Amazon, Berkshire Hathaway and JPMorgan Chase. That joint venture’s initial focus will be on using technology to provide U.S. employees and their families with easier, high-quality, transparent healthcare at a reasonable cost.

Betting against Amazon represents the type of bravery that can easily tilt toward foolishness, given how it has disrupted pretty much the entire retail world, along with videos, shipping and web services. And in the days following the PillPack announcement, investors were putting their money with Amazon, with stocks of traditional pharmaceutical players declining.

But that doesn’t mean Amazon will have it easy.

Pill Challenges

For starters, PillPack sources its products from AmerisourceBergen, and Walgreens — a major player in selling medicine to consumers, and a company that has established relationships with insurance providers — owns 26 percent of that supplier. Not only that, but at least one recent report said that Walgreens might be trying to buy AmerisourceBergen, creating a potential conflict if Amazon and Walgreens go head-to-head on drugs.

There is also the question of whether Amazon can, via PillPack, offer a wide enough range of options to get enough consumers to switch pharmaceutical providers, at least in the short term. For instance, Express Scripts, a major pharmacy benefits manager, has yet to reach a new rate agreement with PillPack to replace the one that expires this month.

“Other pharmacy benefits managers might shy away from maintaining an agreement with PillPack if they see it as a threat,” a recent report said. “For that reason, it might take some time before the company is able to offer cheaper, in-network prices on prescription medicines.”

Timing Questions

Amazon might need a year to get to that point, as Stephen Buck, who had worked at drug distributor McKesson, told CNBC. “Amazon might pick a small market, like a single state, to pilot the offering before expanding to others. PillPack operates in 49 states,” the report added.

Other observers expect Amazon to take a “Whole Foods” approach, by quickly offering discounts anchored around its new acquisition. “Amazon could rename PillPack as ‘Amazon Pharmacy’ and start right away,” Talha Sattar, CEO of internet pharmacy start-up Nimble, told a reporter. “The bigger question is about the form that the offering will take.”

One possible customer base? Consumers who pay cash for their prescription medicines, people who generally buy generics or shoppers who use coupons for drug purchases. Such offerings could appeal to people without insurance, or people whose plans require high deductibles.

Healthy Relationships

To get further into healthcare, and to make the most out of its PillPack acquisition, Amazon also will have to establish a new set of relationships. The eCommerce company certainly has deep expertise in managing its business with a variety of suppliers, marketplace sellers and other participants in the online retail ecosystem – but pharmacy is a different business, at least according to Amazon’s potential competitors in that sector.

“Pharmacy work is much more complex than just delivering certain pills or certain packages,” said Walgreens CEO Stefano Pessina during the company’s recent earnings conference call. Not only that, but Walgreens and CVS are working to become local healthcare centers, offering simple medical services beyond the dispensing of drugs. Amazon does not yet have that holistic view.

“Steadily increasing drug costs, and the current transition in healthcare from volume to value, require us to continually develop and implement innovative solutions to help our clients manage pharmacy costs while improving health outcomes,” CVS Health Chief Operating Officer Jon Roberts said earlier this year.

No doubt Amazon had an army of smart professionals digging into those questions before it bought PillPack, and no doubt the eCommerce operator will devote mountains of cash and data analysis to solving them. Even so, medicine is a new world for Amazon, and the competition will be as entrenched and fierce as it has ever faced.