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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Amazon.com    AMZN

AMAZON.COM

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Amazon Buys Online Pharmacy PillPack for $1 Billion -- 4th Update

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06/28/2018 | 02:01pm EST

By Sharon Terlep and Laura Stevens

Amazon.com Inc. is buying online pharmacy PillPack Inc. giving the e-commerce giant the ability to ship prescriptions around the country, and overnight, making it a direct threat to the more than $400 billion pharmacy business.

PillPack presorts medications and ships them to customers' homes in 49 U.S. states, excluding Hawaii.

Amazon is paying roughly $1 billion in cash for the five-year-old startup, according to people familiar with the matter. The online retailer beat out Walmart Inc., which also was in talks for PillPack, one of the people said. Walmart had no immediate comment.

The deal for PillPack fires a warning shot to drug chains and retailers including CVS Health Corp. and Walmart, which have big pieces of the prescription market. The acquisition means Amazon doesn't have to build capabilities in-house that current players have spent years assembling.

Shares of CVS, Walgreens Boots Alliance Inc. and Rite Aid Corp. tumbled Thursday, and the three companies lost more than $11 billion in market value.

But the health-care market may be more challenging for Amazon to disrupt than Wall Street thinks. It is highly regulated, and depends on a complex web of contracts, interconnected data systems and other relationships with health plans, drug-benefit managers and other health-care players that Amazon can't afford to alienate if it wants its pharmacy business to prosper.

Walgreens executives were holding a conference call with financial analysts when Amazon announced the deal. Walgreens CEO Stefano Pessina said the company is "not particularly worried" about the move.

The drugstore chain is "not complacent," Mr. Pessina said, but "the pharmacy world is much more complex than just delivering certain pills or packages. I strongly believe that the role of the physical pharmacy will continue to be very, very important in the future."

PillPack's specialty -- packaging a month's supply of pills for chronic-disease patients -- is just a small part of the overall market and "has never achieved much retail share," Raymond James & Associates said in a note to investors.

CVS also played down the threat from Amazon's deal, saying it already offers multi-dose packaging that can be mailed to a patient's home or local pharmacy for pickup.

"We believe that we are well-positioned in the market and ahead in this area," a spokesman said. "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."

The news could impact other companies that play important roles in the drug-supply chain beyond retail pharmacies, including middlemen such as Express Scripts Holding Co. that oversee prescription-drug benefits for employers and health insurers, as well as drug wholesalers such as AmerisourceBergen Corp. Shares of both companies also retreated.

The acquisition adds to recent moves by Amazon to wade deeper into health care, from pushing supplies for hospitals to helping form a nonprofit aimed at addressing rising costs. It is also the latest move by Amazon into a major new category via acquisition, following its purchase last year of Whole Foods Market, which allowed it to buy supply-chain expertise and a physical network of stores.

Amazon has been debating internally whether to enter the pharmacy market for years, according to people familiar with its thinking. It is a natural next step for the online retail giant, but the industry is complex.

Amazon typically builds most businesses from scratch, choosing acquisitions for when it thinks a deal will give it a faster road to entering that market or acquiring needed expertise, according to people familiar with its thinking. In PillPack's case, it is likely a combination of both.

Boston-based PillPack, which was started in 2013, has raised $118 million from venture capitalists including Atlas Venture, Accel Partners and CRV. Its co-founder and CEO TJ Parker said in November that it had tens of thousands of customers and was on track for more than $100 million in annual revenue.

The deal is expected to close during the second half of this year, the companies said Thursday.

To stave off home-delivery service competition from Amazon and other rivals, CVS earlier this month struck a deal with the U.S. Postal Service to pick up prescriptions at CVS stores and bring them to customers' homes in one or two days. Customers will be charged $4.99 per delivery, which could include over-the-counter products such as aspirin or face wash.

CVS's $66 billion bid for insurer Aetna Inc. was in part an attempt to position the company to better defend against Amazon as a potential rival.

Drug-benefit managers, such as CVS's Caremark unit, Express Scripts and UnitedHealth Group Inc.'s OptumRx, have mail-order pharmacies that ship prescriptions to patients. PillPack works with all of the major drug-benefit managers, but Amazon's purchase threatens a powerful new source of competition.

The online retailer's entry could also squeeze another set of companies that play an important role in the drug-supply chain. Wholesalers like AmerisourceBergen, McKesson Corp. and Cardinal Health Inc. buy drugs from their manufacturers and ship the therapies to pharmacies. Their relatively low margins could be pressured even further by Amazon.

But Evercore ISI notes that Amazon tends to use secondary distributors, such as FedEx and UPS, rather than undercut them in order to extract profit.

In anticipation of the online threat to their businesses, the drug-supply chain has been moving to consolidate. Express Scripts agreed to be bought by health insurer Cigna Corp. for $54 billion, while AmerisourceBergen has discussed a deal with Walgreens, The Wall Street Journal has reported.

Amazon has had an on-again-off-again interest in health care. In 1999, it bought a 40% stake in Drugstore.com Inc. Drugstore.com eventually was bought by Walgreens, which said in 2016 it was shutting down the site to focus on its own digital efforts.

Amazon rattled the health-care market when it announced earlier this year it was forming a nonprofit venture with JPMorgan Chase & Co. and Berkshire Hathaway Inc. aimed at reducing the three companies' health-care costs. The company last week announced its new CEO.

--Yuliya Chernova and Jonathan D. Rockoff contributed to this article.

Write to Sharon Terlep at sharon.terlep@wsj.com and Laura Stevens at laura.stevens@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
AMAZON.COM -1.22% 1861.64 Delayed Quote.0.75%
AMERISOURCEBERGEN CORPORATION -2.46% 88.92 Delayed Quote.4.59%
EXPRESS SCRIPTS HOLDING CO -3.62% 92.33 Delayed Quote.0.00%
ONE STOP SYSTEMS, INC. -4.84% 2.75 Delayed Quote.36.14%
WALGREENS BOOTS ALLIANCE -2.36% 52.04 Delayed Quote.-11.74%
WALMART INC. -1.24% 114.37 Delayed Quote.-2.55%
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