Amazon’s Acquisition of PillPack Is the Start of Something Big

PillPack - Amazon’s Acquisition of PillPack Is the Start of Something Big

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E-commerce and cloud giant (NASDAQ:AMZN) is finally making its big and long-awaited push into the drugstore and pharmacy market.

In a June 28th press release, Amazon announced that it had signed an agreement to acquire online pharmacy start-up PillPack for an undisclosed amount. The news is big because PillPack has pharmacy licenses in all 50 states, so through PillPack, Amazon can essentially now begin its multi-year excursion into the massive U.S. pharmacy market.

Shares of CVS Health (NYSE:CVS), Walgreens Boots (NASDAQ:WBA), and Rite Aid (NYSE:RAD) plunged in response to the news. Shares of Amazon rose slightly.

Is Mr. Market right about this one? Will Amazon’s acquisition of PillPack begin a multi-year stretch of Amazon advances and traditional pharmacy declines?

I think so. Amazon’s intention is to do in pharmacy what it did in retail. While that doesn’t mean the end of pharmacy is near, it does mean market share losses are imminent for traditional drugstore operators.

Here’s a deeper look.

Amazon Is Ready To Make Its Big Push

There has been a lot of talk about Amazon’s expected big push into pharmacy over the past several quarters. But the big problem has always been the pharmacy licenses. Despite its best attempts, Amazon still only had pharmacy licenses in somewhere around 12 states. You can’t launch much of a pharmacy business on the scale Amazon wants with a presence in only 12 states.

But PillPack gives Amazon pharmacy licenses in 50 states. Thus, this acquisition gives Amazon the one thing it really needed to launch a full-scale pharmacy business.

Next up, Amazon will make its big, national push into the pharmacy business.

What will this business look like? A massive online drugstore. PillPack is already an online focused pharmacy that organizes and delivers medication packages for customers across the U.S. The business isn’t small, is expanding, and did over $100 million in sales in 2017.

In other words, the online pharmacy industry is already booming, and some industry observers expect the e-pharmacy market to grow by 15% per year over essentially the next decade.

Amazon will be the big driver of that big growth. PillPack is the nascent business that will turn into a huge Amazon E-Pharmacy operation over the next several years. Considering the pharmacy market generates $300 billion in annual revenues, Amazon E-Pharmacy could be the next big thing in the already robust Amazon growth narrative.

Pharmacy Will Turn Into Retail

In the big picture, Amazon intends to do in the pharmacy world over the next several years what it did in the retail world over the past several years. Namely, Amazon intends to shift the operating model from brick-and-mortar to digital, lower prices to near break-even, and make quick delivery the norm.

These attempts will work. The pharmacy model isn’t too different from the traditional retail model. As such, it is exposed to the same secular shifts towards e-commerce that killed brick-and-mortar retail over the past several years.

Does that mean the likes of CVS, Walgreens, and Rite-Aid are go-broke operations? Hardly. Look at Macy’s (NYSE:M), Kohl’s (NYSE:KSS), and Target (NYSE:TGT). Those stocks are bouncing because the retail apocalypse is over, and the market is starting to realize that traditional brick-and-mortar retail giants can co-exist alongside Amazon.

But these bounces only happened after big beat-downs.

The same will happen in the pharmacy world. Shares of pharmacy operators like CVS, Walgreens and Rite-Aid will likely struggle over the next several quarters to years as Amazon builds out its e-pharmacy business to be an extension of its e-commerce business. Amazon will gain market share in the pharmacy world. CVS, Walgreens and Rite-Aid will lose share. The numbers will be ugly, and the stocks will drop.

But eventually, there will be a bottoming process here. The market will find an equilibrium between Amazon and competitors, and pharmacy operators will bounce back.

Bottom Line on PillPack

PillPack gives Amazon the necessary tools to build a massive e-pharmacy business that could disrupt the entire drugstore market. From this perspective, the pharmacy world in 5 years will look very similar to the retail world today.

That means the next 5 years could be rough for traditional pharmacy operators. I’d say avoid buying the dip in those names. Instead, stay the course with AMZN.

As of this writing, Luke Lango was long AMZN. 

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