Amazon acquisition puts pharmacy sector on notice

Amazon officeAmazon has entered into a definitive merger agreement to acquire PillPack for an undisclosed sum.

The acquisition is expected to have a significant impact on established pharmacy retailers, and CVS, Walgreens and RiteAid saw their stocks plunge following the announcement on Thursday.

Founded in 2013, PillPack is aimed at helping customers who take multiple medications a day manage their health by packaging pills by the dose and delivering them to customers’ homes on a monthly basis. It also offers 24/7 customer service.

The startup reported over US$100 million in revenue in 2017 and has raised US$118 million in funding from investors, including US pharmacy giant CVS and Menlo Ventures. PillPack has been the subject of acquisition talk for some time, and Walmart was rumoured to be interested in purchasing the startup as recently as April.

In the US in particular, an ageing population, skyrocketing costs and complex policies make the pharmacy sector ripe for disruption, with opportunities for companies that can offer simple solutions and low prices to customers.

Neil Saunders, managing director of GlobalRetail, believes this is only the first play in what will be an increasingly aggressive strategy by Amazon to develop a significant presence in the pharmacy market.

“This is incredibly bad news for traditional players, like Walgreens and CVS, who stand to lose the most from Amazon’s determination to grow its share,” Saunders said.

He noted three key challenges for traditional pharmacy players. Firstly, they mostly cater to older consumers, who will become a much less significant part of the market over the next 10 years.

“There is a significant risk that drugstores will see a real erosion in pharmacy customer share, especially in urban and suburban areas where Amazon can quickly deliver,” he said.

Saunders noted that CVS and Walgreens have become particularly reliant on the pharmacy side to drive their business forward, neglecting opportunities to improve their general retail offerings, which could have helped drive foot traffic into stores and helped support the pharmacy side of the business in future.

This missed opportunity will become apparent over the next few years, he thinks. Saunders also noted that Amazon’s entry into any market tends to put downward pressure on prices and upward pressure on costs as others try to match their service.

“This will ultimately result in weaker earnings for drugstores going forward,” he said.

However, Amazon also faces its own challenges, as the pharmacy category is complex with many regulations and procedures that need to be followed.

“PillPack’s visionary team has a combination of deep pharmacy experience and a focus on technology,” Jeff WilkeAmazon CEO worldwide consumer, said. “PillPack is meaningfully improving its customers’ lives, and we want to help them continue making it easy for people to save time, simplify their lives, and feel healthier. We’re excited to see what we can do together on behalf of customers over time.”

The transaction is expected to close during the second half of 2018, subject to regulatory approvals and other customary closing conditions.

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