Amazon announced Thursday that it would acquire PillPack, an online pharmacy with a nationwide reach, in a deal that could quickly make the online giant a major player in the drug business.
The deal is precisely the kind of news that the health care industry has been fearing for months, as Amazon hinted that it was interested in expanding its reach to include prescription drugs, a $ 560 billion business.
One barrier to entry for Amazon had been the bureaucratic hassle of securing pharmacy licenses in each state. But in acquiring PillPack, it is essentially leaping over that hurdle because the company is licensed to ship prescriptions in 50 states.
Shares of Walgreens and Rite Aid dropped more than 9 percent, and CVS Health dropped 6.6 percent, after the announcement.
“PillPack’s visionary team has a combination of deep pharmacy experience and a focus on technology,” Jeff Wilke, Amazon’s chief executive of its consumer business, said in a statement. “We’re excited to see what we can do together on behalf of customers over time.”
Financial terms of the deal were not announced. It is expected to close in the second half of 2018.
Anxiety over what Amazon might do in health care has unsettled the industry and has been seen as one factor in a wave of recently proposed mergers, including CVS’s acquisition of Aetna and a union between the health insurer Cigna and Express Scripts, the pharmacy benefit manager. Last fall, perhaps in a move to get ahead of Amazon, CVS announced it would offer next-day delivery of prescription drugs and same-day service in some big cities. The next-day delivery began this month, for a fee of $ 4.99.
The entry of Amazon into the pharmacy business could make it easier for the big pharmacy benefit mangers to persuade the Justice Department that their contemplated mergers with insurance companies will not harm consumers by hindering competition.
PillPack, which started in 2013, is an online pharmacy that distributes its 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 notes on how it should be taken. It has long been seen as a potential target for larger businesses looking to expand their reach in online drug sales, including Amazon and Walmart.
While innovative, it is not necessarily a major player in the pharmacy world, bringing in about $ 100 million in revenue in 2017, according to the company.
But its offer of a unique service — the easy-to-use packages — with a national reach made it an attractive prospect for Amazon, said Adam J. Fein, chief executive of the Drug Channels Institute, who studies the industry.
After early tussles with pharmacy-benefit managers like Express Scripts, PillPack also managed to join the networks of major benefit managers and insurers, not an easy feat for an online pharmacy that directly competes with many of those companies’ mail-order businesses.
“It’s a turnkey mail pharmacy operation,” Mr. Fein said.
Even as Americans have shifted their buying habits online, prescription drugs have remained a stubbornly brick-and-mortar purchase. About 90 percent of all prescriptions are filled at a pharmacy counter, according to Iqvia, a research firm.
If Amazon can break that habits, it could significantly upend the industry, said Stephen Buck, a pharmaceutical supply-chain expert who co-founded the drug-price website GoodRx. “It helps people to eliminate that trip and buy everything they need from Amazon,” he said.
Independent online pharmacies have had a tough time because the number of consumers who do buy their prescriptions through mail-order are often required to do so by their insurance plans. Pharmacy benefit managers have traditionally offered incentives to employers and insurers who require that long-term prescriptions be filled through the benefit managers’ own mail-order pharmacies.
And for short-term prescriptions, like antibiotics, many consumers prefer their corner drugstore because they often need to fill those drugs right away. About 85 percent of prescriptions in the United States are for refills, according to Iqvia.
But Mr. Buck and others said Amazon may have a new opportunity because of the growing number of Americans without health insurance or those who have such high deductibles that they may be better off bargain shopping on their own. He estimated that about 25 million Americans now fall into that category.
Until now, he said, PillPack has not aggressively competed on price. With Amazon in charge, “how about they start posting prices that are really, really aggressive?” Mr. Buck said.
TJ Parker, a pharmacist, and Elliot Cohen, an engineer, founded PillPack after meeting through a health care innovation program at M.I.T. The start-up’s primary pharmacy is in Manchester, N.H., but it also has numerous other pharmacies, including in Miami, Brooklyn, and Austin, Tex. While it has licenses to deliver drugs in all 50 states, it does not now ship to Hawaii.
It has raised $ 118 million in funding, with investors including Accel Partners, Atlas Venture, CRV, Founder Collective, Menlo Ventures, Sherpa Ventures and Techstars. The company has about 1,000 employees.
The deal for PillPack could just be one piece in Amazon’s broader ambitions in the health care industry.
In January, Amazon, Berkshire Hathaway and JPMorgan Chase announced plans to form an independent health care company for their employees in the United States, in what could become an incubator for new ideas. Last week, the companies said that Dr. Atul Gawande, a Harvard surgeon and staff writer for The New Yorker magazine, would become chief executive of the new business.
Amazon has also pushed to expand its medical supplies business, seeking to become a major supplier for hospitals and outpatient clinics. It received wholesale pharmacy licenses from several states this year that permit it to start selling medical equipment to businesses. Its products could be used to supply operating and emergency rooms, along with outpatient locations.
The company previously attempted to enter the pharmaceutical world in 1999 by purchasing 40 percent of Drugstore.com. However, it ran into logistical and regulatory challenges that ultimately derailed the effort.
John Sculley, a former chief executive of Apple and the chief marketing officer of RxAdvance, a pharmacy benefit manager, said that PillPack was a natural choice for Amazon.
“This one plays right into everything they know how to do,” he said. “It’s in their wheelhouse.”