NEW YORK — Amazon.com’s venture into the pharmacy market has finally been confirmed. On June 28, Amazon announced that it had entered into an agreement to buy U.S.-based online pharmacy PillPack. Amazon did not reveal details of the consideration, but CNBC reported that Amazon made an offer of $1 billion to acquire PillPack after Walmart procrastinated on delivering a higher offer to the pharmacy retailer, despite beginning negotiations months before Amazon entered the fray.

Why has Amazon made an acquisition?

Deborah Weinswig

We see parallels between Amazon’s purchase of PillPack and its acquisition of Whole Foods Market last year. Somewhat like the grocery sector, pharmacy is a tough market for established generalist online retailers such as Amazon to crack — both sectors see low e-commerce penetration rates, and pharmacy retail faces greater regulatory hurdles. So, we are not surprised to see Amazon acquire a specialist retailer in the pharmacy sector, just as it did in the grocery sector. It is a sign of Amazon’s serious intent in pharmacy and grocery that it has effectively admitted that it must adapt its approach to cracking these markets.

At Coresight Research, we had anticipated that Amazon might acquire a pharmacy chain. Amazon has opted to buy another internet retailer rather than a chain, but one that nevertheless gives it nationwide distribution. These acquisitions give Amazon access to established supply chains and distribution channels in sectors that are meaningfully different from the retailer’s traditional focus on discretionary, nonfood goods.

What does PillPack have
to offer?

PillPack sells prescription drugs in convenient packaging for patients with chronic conditions or those with multiple prescriptions. PillPack’s business arsenal is packed with tools that Amazon will have at its disposal to become a worthy contender in drug retail and ­distribution:

• Drug licenses in all 50 states — This will help eliminate Amazon’s need to acquire licenses for each state. Amazon had already acquired licenses in 12 states as of November 2017, and it would be rather challenging for it to acquire licenses in all states, considering that it is not a specialist drug retailer.

• Accreditations from recognized trade bodies — PillPack holds accreditations from the Utilization Review Accreditation Commission (URAC) and the Verified Pharmacy Practice Sites (VIPPS) program. URAC is a nonprofit organization that reviews business practices and monitors quality improvement and management of firms involved in health care provision. Several institutional health care consumers and other stakeholders in the industry require the businesses they work with to be URAC certified.

VIPPS reviews whether internet pharmacies are operating in compliance with U.S. regulations, and its accreditation provides several benefits, including being considered an authentic pharmacy retailer by payment network providers.

• In-network pharmacy with several PBMs — According to its website, PillPack “is an in-network pharmacy with all major pharmacy benefit managers, including the following: CVS Caremark, Express Scripts, Optum Rx, Prime Therapeutics, Humana Pharmacy Solutions, Cigna, Aetna, MedImpact, EnvisionRx and CastiaRX. As part of these relationships, PillPack is also in network with most major Medicare Part D plans.” This helps prescription drug users to obtain higher discounts from PillPack than from out-of-network pharmacies.

• PharmacyOS proprietary pharmacy management system — PillPack’s PharmacyOS is a pharmacy application that helps pharmacists and consumers manage medications. The proprietary software and engine is capable of processing multiple prescriptions at once, which is challenging for regular pharmacy management applications. It automatically checks when a customer’s prescriptions are running out and prompts to order refills. The system also processes insurance checks and claims.

Amazon’s pharmacy ­ambitions

As PillPack offers all of the aforementioned features, as well as its existing customer base, distribution channel, logistics network and drug retail expertise, it is easy to see why Amazon chose this route to cement its entry into the pharmacy sector.

Amazon’s intentions to penetrate the pharmacy sector have been apparent for at least a year. In November 2017, it was widely reported that Amazon had held strategic meetings, hired relevant personnel and acquired wholesale drug distribution licenses in several states — signs that pointed to its imminent entry into the pharmacy sector even though the company had not explicitly stated its intention to do so.

Other moves we had expected from Amazon if it decided to expand into the pharmacy market were:

• Become an online pharmacy retailer — Since Amazon already sells over-the-counter medications and health supplements on its U.S. website, this seemed like the most likely choice. Having PillPack in its portfolio will accelerate this distribution channel.

• Become a wholesale distributor — At presstime, Amazon had acquired wholesale drug distribution licenses in 12 states, but it is unclear whether the company had acquired licenses on its own in the other 38 states. With PillPack already licensed in all 50 states, it may not be necessary for Amazon to pursue these licenses after all.

• Create independent Amazon pharmacies or in-store pharmacies at Whole Foods — Amazon could still set up PillPack-branded or self-branded in-store pharmacies at the Whole Foods locations that it acquired, or use those stores as pickup points for drugs ordered online.

The acquisition of PillPack seems to present opportunities for all of these to materialize.

What else has Amazon done?

In January this year, Amazon took another major step into health care — it formed a venture along with conglomerate Berkshire Hathaway and investment bank JPMorgan Chase to address the health care of their combined staff of over 1.2 million. The joint statement revealed that “the initial focus of the new company will be on technology solutions that will provide U.S. employees and their families with simplified, high-quality and transparent health care at a reasonable cost.”

What we think

PillPack’s unique selling proposition is that it is an online pharmacy pure play and its operations have immense potential to synergize with Amazon’s extensive retail operations. With the acquisition of PillPack, Amazon can bypass some of the challenges that typically accompany the entry of a new player into a segment unknown to it. For this reason, we see parallels with Amazon’s acquisition of Whole Foods. Both indicate the seriousness with which Amazon is approaching nontraditional ­categories.

Deborah Weinswig is founder and chief executive officer of Core­sight Research. She can be reached at [email protected].