Tech giant Amazon’s acquisition of online pharmacy PillPack has caused the stock prices of rival healthcare distributors in the US to fall dramatically. With this move, Amazon has signalled its intent to move into the medical distribution arena and promises to seriously disrupt the way the industry operates.

“This acquisition is a major development and may be the first step of many”

Daniel Ives, GBH Insights

Amazon already hoovers up over 40 percent of all online sales in the US and the PillPack takeover of a reported USD one billion follows a prolonged period of anxiety within the healthcare industry that the company would start selling prescription drugs in addition to its many other business lines.

The looming spectre of Amazon’s move into healthcare has spurred a flurry of mergers and acquisitions in recent months as industry players have moved to increase the scale and scope of their operations to compete. The Financial Times notes that pharmacy chain CVS Health agreed to acquire health insurer Aetna for USD 69 billion in December 2017 and Cigna, a rival health insurer, agreed to pay 67 billion for Express Scripts, a pharmacy benefits manager that also delivers medication by mail, in March.

Regardless of this consolidation, investors in traditional pharmacy chains seem to have been spooked by the recent Amazon-PillPack tie-up – in the aftermath of the deal’s announcement, shares in CVS Health and Walgreens Boots Alliance dropped by more than eight percent, with these chains losing around USD 11 billion market value – while Amazon shares grew by two percent.

Industry insiders are clear that further disruption to traditional distribution models is on the horizon, Neil Saunders of GlobalData Retail posits that Amazon’s entry into drug distribution is “a warning shot in what is about to become a major battle within the pharmacy space.” Daniel Ives of GBH Insights agrees, noting that “It’s part of the strategy that they’ve been slowly building brick by brick, but this acquisition is a major [development] … and may be the first step of many.”

Courtesy of: Visual Capitalist

As well as Amazon’s enormous market value – more than all of the publicly traded department stores in the US put together for example (see above chart) – the company has advantages over traditional retailers in terms of its extensive logistics network and loyal base of subscribers to its ‘Prime’ subscription delivery service. As Baird’s Colin Sebastian points out, “Timing of refills, renewals, and shipments is critical for medication deliveries.” Sebastian adds that Amazon would likely look to bundle its prescriptions with other products where people make regular, frequent purchases, such as groceries.

The traditional retailers do however, have confidence that this massive sea change in the way pharmaceutical distribution is conducted will not happen overnight. Stefano Pessina, Walgreens executive chairman, said of the move: “It is a declaration of intent from Amazon, but you see pharmacy work is much more complex than just delivering certain pills or certain packages … I believe strongly [that] the role of the physical pharmacy will continue to be very, very important in the future.”

Writer: Patrick Burton