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NEW YORK — For the pharmaceutical industry, and particularly drug store retail chains like CVS Pharmacy and Walgreens, Amazon.com is about to become a headache that not even the strongest pain meds can cure.
Kristen Lucas
The e-commerce behemoth recently announced its intent to purchase online pharmacy PillPack to the tune of around $1 billion in cash, causing — as Amazon announcements are wont to do — a frenzy of doomsday predictions on the internet. The transaction is expected to close in the second half of 2018 and threatens to eliminate one of the few remaining differentiators that pharmacy retailers have in the fight against Amazon: the sale of prescription drugs.
If this story feels familiar, it’s because this isn’t the first pharma-related stir Amazon has caused. It first entered the pharmacy conversation back in 2017, when it established a pharmacy task force. Since then it has acquired wholesale pharmacy licenses in several states, launched its Basic Care line of private label medicines, and partnered with Berkshire Hathaway and JPMorgan Chase with the goal of streamlining the U.S. health care system.
Despite all that, bureaucracy and regulations have slowed Amazon’s expansion into the industry. Health care and pharma are notoriously opaque and highly regulated fields, dominated by powerful players that have been entrenched there for decades. Those conditions make a breakthrough considerably tough, even for a company that is well known for disrupting industries.
Enter PillPack. Founded in 2013, PillPack is an internet pharmacy that distributes medications in simple packages that are presorted by the dose and include a label with a picture of each pill and instructions on how it should be taken. The method of distribution is particularly helpful for consumers with chronic conditions and numerous prescriptions that are difficult to keep track of.
As a relatively small startup with about $100 million in annual revenue and 40,000 customers, PillPack until now has likely not attracted much attention from the pharmacy industry at large. However, a peek into Market Track’s advertising data shows that PillPack has been investing steadily in raising brand awareness with the public. It is ranked seventh in pharmacy-related ad spend, just behind Johnson & Johnson Services Inc. and beating out several big names, including Pfizer Inc.
Regardless of size or notoriety, it’s easy to see why PillPack is a good fit for Amazon. First and probably foremost, with the acquisition Amazon will immediately gain pharmacy licenses in 49 states — thus avoiding the regulatory hassle that it would face if it were to continue obtaining them on its own.
Additionally, PillPack’s mission and focus on technology fits nicely with Amazon’s commitment to improving the lives of consumers, and both companies are known for offering consumer-centric, frictionless customer experiences. With PillPack’s innovative packaging combined with Amazon’s expertise in logistics, problems that have beleaguered the medical community for years could be elegantly solved. For example, approximately 50% of patients with chronic illnesses don’t take their medications as prescribed. PillPack’s individual, presorted packets make it virtually impossible to take medications incorrectly, and with a reminder from Alexa those dosages will no longer be forgotten.
This isn’t to say, though, that Amazon won’t face challenges even with PillPack in their corner. Amazon could start selling medications to uninsured and cash-paying customers as soon as the ink dries on the deal, but selling to customers with insurance is a trickier prospect. To succeed there, they will need relationships with at least one of the major pharmacy benefit managers. Experts disagree on whether Amazon will have success forging those relationships, since Amazon could be a competitor to many PBMs. PillPack currently comes with an agreement with the PBM Express Scripts Inc., but that deal expires in July and has not yet been renegotiated.
On top of that, to fill prescriptions Amazon will require access to patients’ sensitive personal health care data, which is highly regulated by the government through HIPAA. Amazon already collects a significant amount of consumer data from its customers that it uses in all manner of ways, and it will need to figure out either how to wall off that section of the business from the rest or how to make the rest of the business compliant with health care data privacy laws.
None of that should give drug store retailers much comfort, though. Amazon is not here to play. It is in the business of disruption, and to assume the pharma industry is immune to that is folly.
Amazon’s intent is clear — just consider the alliance it has already formed with Berkshire Hathaway and JPMorgan Chase to overhaul the health care system. If the playing field is not set in Amazon’s favor, it will reset it, and if it can’t do that it will just create a new field altogether.
What’s more, that field may not only include online pharmacy. Let’s not forget that Amazon owns a grocery store chain now. Although Whole Foods Market locations currently do not have a pharmacy counter, that certainly doesn’t mean that they won’t in the future.
There is some good news for drug stores, though. As mentioned before, this is not a simple category to break into. Drugs are, of course, a little more heavily regulated than books or groceries. Additionally, there is already precedent that allows us to think the pace of disruption may be slow and deliberate — it’s been almost a year since Amazon bought Whole Foods, and traditional grocery stores haven’t exactly gone out of business yet.
To survive, it is incumbent upon drug stores to change the way they interact with consumers. Automatic refills and a convenient location are no longer enough to retain customers. Pharmacy retailers and health care companies need to provide a superior experience, both in-store and online, and connect with their customers on an emotional level.
There is one thing that traditional pharmacies have that Amazon currently cannot offer: human contact. Customers visiting a pharmacy are often ill and at a low moment in their lives. The compassion and empathy a pharmacist can show in person could far outweigh the convenience of having a prescription delivered to your doorstep.
Convenience, however, is still vital: a seamless experience between in-store, online and mobile is the bare minimum for competing with Amazon effectively. Speedy delivery will be key, too. Amazon’s initial interest in the business has already spurred pharmacies to improve service in that area, and they will now need to raise their game even higher.
It’s fair to say that Amazon’s entry into the industry introduces much uncertainty about the future of pharmacy in the U.S. This could be the start of a very long-term shift in the way people purchase medications — or it could happen overnight. What is clear, either way, is that companies that fail to innovate, deliver value and provide positive experiences to their customers will probably not be a part of that future.
Kristen Lucas is product marketing coordinator at Market Track. She can be contacted at klucas@markettrack.com.
