Amazon's PillPack Acquisition: What It Means For The Tech Giant And Everybody Else

Amazon.com, Inc. AMZN announced its acquisition of PillPack, an online pharmacy previously targeted by Walmart Inc WMT.

The transaction is seen to advance Amazon’s health care campaign to the detriment of the vast and diverse sector.

What It Means For Amazon

Amazon had already made strides in health care before pursuing PillPack. It sold medtech domestically, delivered drugs internationally, and teamed up with Berkshire Hathaway Inc. (NYSE: BRK-A)(NYSE: BRK-B) and JP Morgan Chase & Co. JPM to develop a health venture supporting employees.

But Thursday’s move “opens another major category for Amazon,” according to JMP Securities analyst Ronald Josey.

“As pharma moves online, PillPack gives Amazon a head start,” Josey wrote. “[...] While online pharmaceutical sales are nascent, we think there is significant demand.”

PillPack will help Amazon pervade the $350 billion to $400 billion domestic pharmacy market and $2 trillion global market by expanding the firm’s pharmacy licenses from 12 states to 49 states. At the same time, Amazon’s infrastructure can enhance PillPack’s ordering, delivery, scale and user experience.

“Over time, we would expect PillPack to be included as part of Prime, benefiting from Amazon’s logistics expertise and leveraging its 70-plus million subscribers in the U.S., among other benefits,” Josey wrote.

By D.A. Davidson estimates, a successful integration could drive forecasted compound annual sales growth 64 basis points and dilute long-term margin forecasts for earnings before interest, tax, depreciation and amortization (EBITDA) 68 points. And that’s keeping the opportunity online.

“We see the potential for the company to add pharmacies to its Whole Foods physical stores, which would enable it to further exploit the market opportunity,” D.A. Davidson analyst Tom Forte wrote.

What It Means For Everyone Else

Deutsche Bank called the event “definitely a negative” for the pharmacy supply channel, and Bernstein agreed.

“It is important to note that AMZN will likely employ a low margin, market share-first philosophy, which we believe will negatively impact the drug supply margins,” Bernstein analyst Lance Wilkes wrote.

The online element is seen to particularly harm independent pharmacies and large drug retailers like CVS Health Corp CVS and Walgreens Boots Alliance Inc WBA.

“AMZN's acquisition of mail order pharmacy PillPack has enlarged the overhang on the retail pharmacy space, which would prevent both WBA and CVS Health Corp from seeing meaningful stock upside near-term,” Jefferies analyst Brian Tanquilut wrote in a Walgreens downgrade note.

Pharmacy benefit managers also face a new competitive threat.

“We also see online pharmacy negative for store level economics of large pharmacy retailers and challenging to PBMs as we believe it creates transparency which can compress retail spread,” Wilkes wrote.

Notably, though, drug distributors are seen to be less vulnerable to disruption.

“We are surprised that the drug distributors are down by as much as they are, given our view it is unlikely that AMZN will consider getting into the drug wholesale business,” Deutsche Bank analysts Lloyd Walmsley and Glen Santangelo wrote.

What Precedent Suggests Could Happen

Cantor Fitzgerald was less concerned about legacy health care peers considering a previous Amazon venture, Drugstore.com, was routed by PBMs that excluded the channel from their pharmacy networks.

“Pharmacy networks are controlled by managed care companies and pharmacy benefit managers with captive mail order capabilities,” analyst Steven Halper wrote. “Payers typically require health plan members to use their captive mail order pharmacies. Even if PillPack is a network provider today, it does not mean it will be a network provider in the future, especially if AMZN has designs of significantly ramping its prescription volume.”

Halper expects no material impact on managed care companies.

The Ratings

D.A. Davidson maintained a Buy rating on Amazon with a $2,100 price target, while JMP Securities maintained an Outperform rating and $1,840 target.

“Amazon continues to evolve and innovate, and I believe significant upside exists from current levels,” Tigress Financial managing partner Ivan Feinseth wrote.

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