Andy Gordon Gives Amazon’s PillPack Acquisition a “4”

Our kids packed their bags about a decade ago and left home.

My wife and I are empty-nesters. But we don’t feel like empty-nesters.

We’ve “replaced” them with our three dogs and a cat. Inviting them into our lives has worked out pretty well.

But I don’t remember issuing an invitation to Amazon. Guess it didn’t need one. This weekend – a typical one for us – is as good an example as any.

On Saturday, we got a package from Amazon – something my wife ordered. Don’t ask me what. We get three to four packages a week from the company. I stopped keeping track a long time ago.

We shopped at Amazon subsidiary Whole Foods Saturday afternoon. And Sunday evening, we binge-watched Amazon Prime’s (Prime Video) original show Goliath. (It stars Billy Bob Thornton as a brilliant lawyer who spends more time in his favorite bars than in the courtroom. It’s a great show. Check it out.)

Amazon has done such a great job insinuating itself into our daily lives that it left me wondering if there are any big parts of our lives remaining for Amazon to take over.

I just got my answer – our daily diet of pills. Amazon bought PillPack last week for a cool $1 billion.

PillPack mails out medications. Its niche is that it presorts them by day. That’s particularly useful for seniors, who can have trouble keeping track of the multiple pills they take every day.

Amazon Doesn’t Deserve Its Rave Reviews

So now Amazon is entering the online pharmaceutical delivery business – a $450 billion space, according to Pew Research Center.

The immediate reaction from “experts” has been overwhelmingly positive. “They really have deep skills and ability to increase the efficiency of the supply chain. I think it’s the perfect entry for them into the prescription drug field,” said Marianne Udow-Phillips, executive director of the Center for Healthcare Research & Transformation at the University of Michigan.

Most other comments were equally effusive. “This one plays right into everything they know how to do,” former Apple CEO John Sculley said. “It’s in their wheelhouse.”

It’s just a hop, skip and a jump to go from the perfect market entry strategy to a future with Amazon dominating the pharmacy space. “In our view,” said Neil Saunders, managing director of GlobalData Retail, “this is only the first play in what will be an increasingly aggressive strategy… [It’s] incredibly bad news for traditional players like Walgreens and CVS…”

I get it. Amazon is one of the biggest and savviest players at this moment. But in this case, Amazon doesn’t deserve rave reviews.

On a scale of 1 to 10, I’m giving Amazon a 4 on this acquisition, and only because I’m feeling generous. Here are my five reasons why.

  1. Not as big a market as you think. The pharmacy business is a $450 billion market. But through its acquisition of PillPack, Amazon has gained access to far less than half of it. Mail order makes up only $150 billion of that market. What’s more, PillPack’s niche of repackaging multiple pills into a single easy-to-use package is an unimpressive subset of the smaller $150 billion market. In short, Amazon has NOT found a shortcut to gain access to the overall market.
  1. Not moving the needle in delivery options. For one thing, urgent needs go unaddressed. Amazon has absolutely no ability to make one-hour or same-day deliveries. That would require a network of local pharmacies close to the consumer. PillPack’s four regional mail-order pharmacy facilities fail to deliver the necessary infrastructure to provide same-day delivery capabilities. Amazon’s “last mile” capability remains 1,000 miles away.
  1. Not the licenses it will actually need. Much was made in the immediate aftermath of Amazon’s acquisition that it’s now licensed to sell prescriptions in 49 states. But PillPack is licensed as an out-of-state mail-order pharmacy only. Amazon is NOT licensed to deliver meds locally. That’s a big missing piece.
  1. Not an unstoppable force. Amazon is stripped of two of its favorite tactics to weaken/overcome the competition. One is undercutting price. Third-party payors like insurance health plans determine price. The second is offering the widest selection. Pharmacies routinely do this anyway.
  1. Not as easy as it seems. Selling meds isn’t like selling toothpaste. For example, the shipping of some pain meds and narcotics is governed by a slew of strict regulations. Amazon would have to develop multiple vast networks with doctors, drug-benefit managers, insurance companies and other healthcare players to operate in that space. It would also have to find a way to deliver meds faster than using mail. But its gig drivers aren’t the answer. Amazon would most likely have to establish an entrusted “chain of custody” protocol. And that means hiring full-time employees as drivers. Is Amazon prepared to do that or make any of the other difficult decisions it will face?

Bottom line: From here on in, its choices become much tougher.

Frankly, I’m underwhelmed by Amazon’s latest move.

Instead of ushering the pharmacy business into its high-speed, high-convenience future, Amazon bought a mail-order company. That’s about as old-school as you can get.

The retail pharmacy business is growing by $20 billion a year in the U.S. By contrast, drug delivery via mail orders has declined in the past five years.

I expect prescription usage will continue to grow, thanks to aging boomers, increased life expectancy and an expanding universe of people eligible for the Medicare prescription program and new drug therapies.

It’s no wonder Amazon is drawn to this market’s massive size and growth. It’s also wary of its complexity.

PillPack offers some convenience… it gives Amazon some industry know-how…

Kicking the Can Down the Road

It’s not a complete waste of time and money. But it’s a tentative half-step undertaken by a company that could easily afford the $1 billion purchase price and clearly wants to keep its options open.

Amazon smells a vulnerability that is very real.

Traditional pharmacies are overripe for disruption. According to a 2013 industry study, the median wait time at a pharmacy is 45 minutes. A third of visits require a return trip.

The business model is clearly outmoded.

But Amazon, for all its strengths and past success in moving into new markets, is not particularly well-equipped to take on the pharmacy industry.

It does, however, raise a fascinating question. If not Amazon, then who?

Good investing,

Andy Gordon
Co-Founder, Early Investing