Mario's Corner - July 2018.

How Amazon's Acquisition of PillPack Can Disrupt The Pharmaceutical Industry - and Two Key Issues It Needs to Overcome To Achieve It.


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I wrote in my February column about how Amazon is teaming up with Berkshire Hathaway and JPMorgan to lower the spiraling health costs that have bedeviled most companies (to read that column please click here).  This past week. Amazon took another step in its strategy to disrupt the pharmaceutical/health industry.  On Friday, it announced it has acquired PillPack, a Boston-based start-up that helps people to manage their prescriptions by sorting medications by dose and delivering them to people's homes.


PillPack is a start-up that was founded when TJ Parker, a pharmacist, met Elliot Cohen, an engineer at MIT.  TJ thought there should be a better way to deliver prescriptions to people.  The basic premise is that all medications/vitamins/etc. are fulfilled by a licensed pharmacist.  However, instead of people having to go to a pharmacy, to pick up the prescription, the medications are delivered to the person's home.  They are also sorted by days/times.  Thus, the person taking these only has to look at the next "pack" on the schedule and take it according to the directions.  


​When the acquisition was announced, drugstore chains and drug wholesaler companies' valuations decreased dramatically.  Although they have recovered partially, there is a concern that Amazon will do them permanent damage.  To understand why they believe this, it helps to know their business model.


My first job out of Business school was working at a large drugstore chain (Sav-On Drugs) in California as a market analyst.  This chain, like all others, was driven by three goals.  The first was to place their stores in densely populated areas, preferably near concentrations of elderly persons.  The reason for this should be obvious - older people need more medications.  


The second goal was to create a store layout that was conducive to impulse purchases and that would augment the total amount of dollar per visit.  This is the reason why all pharmacies and OTC medication areas are located at the back of the store.  Thus, people have to walk throughout the whole store and this increases the likelihood that people will buy candies, cards, health and beauty aids and other merchandise.  Most people complain that this is very inconvenient when they are sick, but the chains are not trying to make it convenient for people to pick up medications - they want to increase their revenue.


The third and final goal was to run the pharmacy as a stand-alone business to maximize profit.  This is the reason why the pharmacy is under-staffed.  By doing this, chains can increase their profit in this area.  Unfortunately, people are inconvenienced and usually have to wait to get their prescription filled.  Conveniently, this makes them spend more time there and helps the drugstore to achieve the second goal stated above.


For these reasons, PillPack actually impacts drugstores not only in the pharmacy profits, but by decreasing the amount of people who have to go to it to get their prescriptions filled, it impacts all the other areas of the drugstore's business.  Less traffic frequency means less overall purchases.  To realize why this is crucial, think about the last time you went to the drugstore just to pick up some chips or a soda.  You can't?  That's because its prices overall are much higher than a supermarket's.  In other words, if you don't go to pick up a prescription or OTC medication, the likelihood that you would buy other items there are nil.


However, there is one reason why drugstores have survived for such a long time.  The reason is that pharmacists have to be licensed and regulated.  Thus, by buying PillPack, an on-line pharmacy, Amazon buys into a proven business model that has already cleared all regulatory hurdles.


​There are still two key issues that Amazon and PillPack will have to overcome - the regulatory environment risk and public opinion.  


Regulators, including the FTC, states, and the FDA, could impose and expand some rules that could make it difficult for PillPack to expand its business.  For example, there are regulations in Hawaii that prohibit on-line pharmacies from operating in the state.  If other states decide to pass similar ones in response to the drugstore industry's lobbying efforts, it could become more expensive or impossible to operate in these.


​Finally, if there is a mistake made in the fulfillment of the prescription to an individual and that individual is harmed (or worse, killed) by taking the wrong prescription, public opinion could put pressure on regulators and the government to shut down this type of operation.  


As long as PillPack, and by extension, Amazon, understand that prescription fulfillment is not the same as selling books and household items, and put systems in place to avoid any costly mistakes, they should be successful and able to disrupt yet another industry.

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Please do not hesitate to call me at 1 (617) 391-0347 or e-mail me at mariocastaneda@bluesailconsulting.com to talk about this or any other subject.  I always like to hear from clients and readers.  


Also, please don't forget to read my interview with BostonVoyager magazine.  To read it, click here.

 

Please contact us if you want to find out how we can help your start-up to achieve its goals or to become a more attractive target for acquisition.

 

I look forward to seeing you again here in August!

 

Best Regards,

 

​Mario