Amazon + PillPack = Major Market Disruption

PillPack is an online pharmacy that packages, organizes and delivers presorted doses of medications.

Walgreens, CVS and Rite-Aid lose $11 billion in value after Amazon buys online pharmacy PillPack

Tae Kim

Shares of drugstore companies are tumbling Thursday after Amazon announced it signed an agreement to acquire online pharmacy PillPack.

Rite Aid plunged 11.1 percent, Walgreens Boots Alliance sank 9.9 percent and CVS Health fell 6.1 percent, respectively. The three companies collectively lost approximately $11 billion in market value on Thursday alone. Conversely, Amazon shares rose nearly 2.5 percent, adding more than $19.8 billion in market value.

PillPack is an online pharmacy that packages, organizes and delivers presorted doses of medications. Its website says it is licensed to ship prescriptions in 49 states. In November, its CEO said it was on track to post more than $100 million in revenue for 2017.

“PillPack’s visionary team has a combination of deep pharmacy experience and a focus on technology,” Jeff Wilke, Amazon CEO Worldwide Consumer, said in a statement. “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.”

Investors have long expected that Amazon would disrupt the pharmacy business. In May 2017, CNBC reported Amazon was hiring people to break into the multibillion-dollar market. In October, the St. Louis Post-Dispatch reported that Amazon had received approval for wholesale pharmacy licenses in at least 12 states, a report that sent these same stocks reeling that day. All three stocks — Walgreens, CVS and Rite Aid — are down more than 10 percent the last 12 months, in part because of this fear.

More than 4 billion prescriptions are ordered in the U.S. every year. An estimated $300 billion was spent on prescription drugs by patients, insurance companies and other parties in 2015.

The terms of the deal were not disclosed. The companies expect it to close during the second half of the year. PillPack raised $118 million from venture capital firms including CRV and Menlo Ventures.

One Wall Street analyst believes the acquisition will hurt the valuations of drug supply companies.

“We suspect Amazon’s official entry into the space will now place a cap on drug supply chain multiples regardless of whether or not Amazon is able to scale the PillPack business,” RBC Capital Markets analyst George Hill said in a note to clients Thursday. “While Amazon represents a significant new entrant in the space, we remind investors that Rxs are sticky and PillPack focuses on difficult to serve patients without access to adequate pharmacy services.”

Walgreens Boots Alliance acknowledged Amazon’s move into the online pharmacy space.

“Yes, it’s a declaration of intent from Amazon,” CEO Stefano Pessina said in a planned call to discuss its quarterly earnings, according to an initial transcript from FactSet. “[But] the pharmacy world is much more complex than the delivery of a certain [pills or] packages.”

Walgreens shares were down slightly more than 1 percent in Thursday’s premarket session after the company reported its third-quarter earnings results and announced a $10 billion share buyback, before trading sharply lower on the Amazon-PillPack news release.

Drug distributor stocks AmerisourceBergen and Cardinal Health dropped more than 4 percent, while McKesson fell 6 percent on the news.

Asked for comment, CVS Health said in part:

“We already have the capabilities that PillPack is offering and we have scale in the business. Keep in mind, that we have not seen a large shift of patients that are looking for their medications to be delivered versus coming to a retail pharmacy. And for those patients that do desire to transition, we offer the option to ship their prescriptions to their home from our pharmacies or obtain the prescriptions through our Caremark mail facilities.”