When Amazon announced last week that it was buying the online pharmacy PillPack, it sent stocks of drugstore companies like Walgreens and Rite Aid tumbling, as investors worried that the retail behemoth would soon upend the pharmacy market.
But even though Amazon has transformed the way Americans buy products as different as books and diapers, it may not have such an easy time with prescription drugs. That's because to succeed, it will have to do business with powerful entrenched companies who are not necessarily wishing Amazon well.
As a relatively small pharmacy with about $100 million in annual revenue, PillPack most likely didn't attract much attention from the pharmacy industry's giants, said Eric Percher, an equity research analyst at Nephron Research.
"I think they have absolutely been able to fly under the radar," he said. But now that a household name like Amazon is buying the company, "the entities that have enabled PillPack's success — whether they knew it or not — have a decision to make," he said.
PillPack, which was founded in 2013, distributes pills in easy-to-use packages designed for consumers with chronic conditions and multiple prescriptions. The company sorts prescriptions by the dose and includes a label with a picture of each pill and directions on how it should be taken.
While the company had a niche appeal, many analysts have speculated that Amazon's true motivation for buying PillPack is to leapfrog its way into the broader prescription drug business because PillPack has pharmacy licenses in 50 states. It also has relationships with the major pharmacy benefit managers, like Express Scripts and CVS Health, that serve as gatekeepers to the majority of Americans who are covered by health insurance.
"If you want to be a major factor in prescription drugs, you're going to have to have some relationship with a PBM," said John Sculley, a former chief executive of Apple, who is now the chief marketing officer of RxAdvance, a pharmacy benefit manager.
Benefit managers have come under criticism for unfairly excluding pharmacies from their networks. In 2016, PillPack publicly tussled with Express Scripts after the benefit manager excluded the startup from its mail-order network, saying that PillPack had misrepresented itself as a brick-and-mortar company.
Although that dispute was resolved, Express Scripts said Friday that its network agreement with PillPack was expiring in July and that the two companies had not reached an agreement on rates. It also said that it was investigating PillPack for "provider compliance," although it did not elaborate. CVS Health said PillPack is in "many" of its pharmacy networks, including for commercially insured consumers as well as Medicare beneficiaries.
OptumRx, another large benefit manager, did not comment, although a spokeswoman for PillPack said the company is in OptumRx's commercial pharmacy network. She declined to comment on the Express Scripts contract.
Percher said other industry players may also have an interest in muting Amazon's success. PillPack gets its drugs from AmerisourceBergen, a major distributor. Walgreens owns 26 percent of AmerisourceBergen and this year was reported to be in talks to buy the company, a tie that Percher said could pose a conflict if Amazon sought to directly compete with Walgreens.
Ana Gupte, a senior health care analyst for Leerink Partners, said some of these companies could opt to partner with Amazon instead. "They have to decide whether Amazon is a valid threat, or an opportunity," Gupte said. If Express Scripts finds a way to exclude them from its pool of customers, "Amazon will find other ways to get into the market, and they will become a competitor," she said.
Indeed, several industry executives, including Tim Wentworth, chief executive of Express Scripts, have expressed interest in working with Amazon. Express Scripts announced in March that it was being acquired by the insurer Cigna, one of many health care mergers that were seen to have been motivated, at least in part, by hints of Amazon's potential entry into the market.
But Nadina J. Rosier, the health and group benefits pharmacy practice leader at the consulting firm Willis Towers Watson, said she was skeptical that Amazon would link up with an established company. "It's looking to partner with other innovators, not just your standard vendors like your traditional PBMs," she said. Any partner "would have to be one that brings something to the table in an innovative way."
The months of speculation have allowed competitors to prepare, acting as "a catalyst for participants to close ranks against competition and invest to improve the consumer experience," Percher wrote in a research note last week.
Last fall, CVS announced it would offer next-day delivery of prescription drugs and same-day service in some big cities. The next-day delivery began in June, for a fee of $4.99.
In a statement, Express Scripts touted the breadth of its services, saying it delivered more than 100 million prescriptions to patients around the country in 2017. "Our scale and quality of care provides patients with access to a broader suite of products than other smaller pharmacies," the company said.
Nevertheless, customers have long complained that the mail-order pharmacies run by companies like Express Scripts and CVS are cumbersome and confusing — perhaps one reason, even in an era of online shopping, that 90 percent of prescriptions are filled at a retail pharmacy counter, according to the data research firm IQVIA.