Amazon – Pill popper.

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Amazon shakes the ivory towers.

• Amazon has made its move on the retail pharmacy industry by buying PillPack in a move that could have been thwarted by Walgreens or CVS if they had not stayed locked in their ivory towers.
• If Walgreens had purchased PillPack itself and run it into the ground, it would still be $5bn better off than it is today.
• Amazon is thought to be paying around $1bn for PillPack which is an online dispensary based in Boston that aims to make the management of prescriptions very easy.
• The company co-ordinates with doctors and packages all of the medicines to be taken into small packages with the dose, time and date to take the pills printed on the outside.
• This is particularly useful for patients who are on multiple medications or who are elderly or otherwise less able to manage different doses at different times.
• There are two reasons why this is a good fit for Amazon:
  • First, Messy regulation and plumbing: Prescription drugs are heavily regulated but PillPack already has the licences to operate in all 50 states and the relationships with insurance providers and Medicare to handle payments.
  • It has also already built the software to manage patients’ prescriptions, logistics, refills, payments and so on meaning that all Amazon really has to do is bring it to scale.
  • Scale is the big question mark as PillPack is still very small given that the US prescription drug market is worth around $330bn.
  • Despite having everything worked out, bringing PillPack to scale may be far more difficult than it sounds as there is no guarantee that this flexibility has already been built into PillPack’s systems.
  • I think that this may be a major issue as PillPack has been for sale for some time now implying that the model that it has created is having some economic difficulty.
  • Second, Philosophy: PillPack and Amazon are completely aligned in terms of how they think about customers as PillPack aims to offer a far better service at the same or a lower price than regular retail.
  • This is completely in line with Amazon’s dominance strategy which is to offer better quality service at a lower price than anyone else.
  • This strategy is very expensive in the early days (potentially explaining PillPack being for sale) but once it reaches scale it is almost unbeatable.
• Hence, I think that as long as Amazon can bring the software and systems of PillPack to scale and maintain PillPack’s relationships, then it represents a real threat to the retail pharmacies.
• Given the current circumstances, that is a big ask but if anyone can do it, Amazon can.
• Some patients are still going to want to go to the pharmacy and speak to a person but even if Amazon takes a small share of the market, it will create dire problems for the existing status quo.
• Bringing PillPack to scale will take time so Walgreens, CVS etc have some time to react, but they will now be starting from scratch and are not best placed to create fast-moving dynamic businesses.
• I still struggle with the valuation of Amazon as there is no logical or fundamental method to value momentum and as a result I continue to prefer the likes of Baidu, Google and Apple.