Amazon’s War on Drugs

Amazon is going to do more than dispense medications. Jeff Bezos acquisition of TJ Parker’s PillPack may even help end the opioid crisis.

Jeff Bezos, founder and CEO of Amazon

(This article also appeared in Chief Executive Magazine)

June 28th is a good date for starting wars

On that day in 1914, the Archduke Ferdinand of Austria was assassinated. It sparked the First World War. Then the same day in 1919, the Treaty of Versailles was signed. It allegedly led to the Second World War.

On June 28, 2018, Amazon fired the first shot in the retail drug war that may have a similarly disruptive effect on the entire Pharma industry. For the bargain price of $1 billion, Seattle based Amazon acquired online retailer PillPack with barely one-tenth of that in revenues at three times its previous valuation. Why?

Underscoring the deal’s importance is less the price Amazon paid than the value destruction to the other big drug retailers. Wall Street mercilessly cleaved $14 billion off the stock prices of Walgreens, CVS, McKesson, and Amerisource Bergen —on June 28, of course.

Stock price drops for Pharma retailers (table: CB Insights)

Some of the big players are pretending to ignore the realities (just as the great European powers ignored them). The tweet by CNBC’s Carl Quintanilla below is telling.

Bezos has a tendency to be very, very right about many things. So it seems prudent to assume he has some moves here we aren’t seeing clearly yet or at least Walgreen CEO Stefano Pessina isn’t saying. What could they be?

Several reasonable hypotheses from the Bezos-sphere.

Let’s remind ourselves, the sheer size of this transaction suggests Amazon has a doozy of a plan. Also, Bezos is no stranger to healthcare. Warren Buffett chose him as a partner in his new joint venture, along with JP Morgan’s Jamie Dimon. So to say he understands the space would be an Amazon-size understatement.

Coming on the heels of his acquisition of Whole Foods, we know he sees retail as a critical component of customer value. With prescriptions, there is a bonus: they are vital not just useful. People have an incentive to shop with him for a very long time (or so they hope).

He also knew the company was already in discussions with Walmart. It’s nice to know that Bezos has the best intel network in the business world.

If you think of a market as a living organism, Bezos transplanted powerful arms and legs onto Amazon’s drug business. The reason? PillPack’s secret weapon, and what made the deal so cost-effective, is the online startup has licenses to do business in all in 50 states.

Now Bezos gets to do the thing he does best: be impatient.

Freedom to transact across the country gives Amazon’s brand name clout a kind of automatic crushing power against rivals. He gets to go to market instead of having to go through a kludgy drug bureaucracy, his least favorite thing in the world.

And while the company has no international licenses, you can be sure the engineers in Seattle are tweaking the software now.

He knows a good deal is the best deal for the customer.

Transparency of pricing means that Bezos will mercilessly exploit the pricing discrepancy between current retail drug prices and online discount distributors. It is a classic Amazon move, he takes a physical business and runs it on algorithms, then prices it like software.

Drug prices cost comparison (chart: CB Insights)

There is another wrinkle that will play well across the political landscape.

PillPack has an online system — PharmacyOS — which helps manage “patient data and figure out how to balance meds in safe doses for customers.

Don’t think grandmother’s Lipitor. Think uncle’s opioids.

Overdose deaths in the US (CDC)

Citizens of this country consume unthinkable quantities of medication and will continue to do so as we live longer. For many of us, it means tipping the scale on dosages, leading to addiction, leading to overdose and deaths. According to the CDC, the sharpest increased in the 70,000 overdose deaths per year came from deaths related to fentanyl and fentanyl analogs (synthetic opioids).

PillPack has an answer that Bezos likes.

PillPack has proprietary technology that may meaningfully counteract this trend. The company’s CEO, TJ Parker said of this service, “PillPack makes it simple for any customer to take the right medication at the right time, and feel healthier. Together with Amazon, we are eager to…help people throughout the U.S. who can benefit...”

Once again, the man from Seattle seems ahead of his time, the market, and the competition. Let the war begin.