How Much Can Amazon’s PillPack Acquisition Contribute To Its Overall Growth?
Amazon (NASDAQ:AMZN) made headlines again last week after acquiring online pharmacy PillPack for a reported $1 billion. While the acquisition isn’t huge considering Amazon’s sheer size or the revenues earned by PillPack last year ($100 million), the stocks of major pharmacy chains including Rite Aid (NYSE: RAD), Walgreens Boots Alliance (NASDAQ:WBA) and CVS Health (NYSE:CVS) dropped 8-10% on the day the deal was announced. This news wiped out nearly $13 billion in market cap from companies in the pharmacy sector. A similar phenomenon was observed when Amazon acquired Whole Foods last year, with shares of Kroger, Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) dropping in the days following the announcement. This indicates the level of trust that shareholders have in Amazon’s abilities to disrupt established industries. While PillPack might not have an immediate disruptive impact on the retail drug store and pharmacy industry, it certainly opens the door to interesting long-term developments in the space.
Is PillPack A Good Buy?
For a moment, let’s forget that the nominal drugstore and pharmacy spend in the U.S. was over $450 billion last year, of which the three aforementioned companies generated over $170 billion in sales, and that Amazon is on track to make inroads in the sector. The combined e-commerce sales of pharmaceuticals and beauty aids stood at around $30 billion in 2017, of which PillPack generated just over $100 million in sales. On the surface, this doesn’t look like an industry-shaking move, but it is likely to become an extremely lucrative business for Amazon over the long run. There are four main factors that make PillPack a great buy for Amazon:
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1. Presence in 49 states: Unlike regular e-commerce or online grocery businesses, selling prescription drugs online is a heavily regulated business for obvious reasons. PillPack has done the tedious work in 49 states across the U.S. and has regulatory approval to operate in these markets. This makes it easier for Amazon to start selling across almost the entire country with immediate effect.
2. Cater to a Larger Demographic: Senior citizens are the biggest consumers of pharmaceutical products, particularly prescription drugs. Amazon has a higher proportion of younger (18-34 year old) customers that are Prime members as compared to older (55 or above) customers. With PillPack, Amazon can begin catering to more customers in the older demographic, and potentially convert more of them into Prime customers – thereby boosting its other businesses as well.
3. Recurring Revenues: Depending on the prescriptions, pharmacy purchases are often recurring in nature. This should make it easier for Amazon to implement consistent, regular deliveries for repeat customers and add to its already huge recurring revenue base.
4. Scaling Up Due To Add-Ons: With a massive e-commerce infrastructure already in place (which includes over-the-counter drugs) with the added option of grocery shopping, scaling up to begin selling prescription drugs shouldn’t be too difficult for Amazon. Added to this is the fact that Prime subscribers have access to online movies, TV shows and music, of course. This is yet another move to drive more recurring revenues and repeat customers, and should provide a boost to Amazon’s entire ecosystem.
In an earlier note in 2017, we wrote on why Amazon is likely to enter the pharmacy market. Earlier this year, Amazon joined Berkshire Hathaway and JPMorgan (NYSE:JPM) in starting a technology-based healthcare venture to provide “simplified, high-quality and transparent healthcare at a reasonable cost.” Now, PillPack’s services could potentially be a part of it, though the details of the venture are not yet known.
Quantifying Short-Term Impact Of PillPack
Given that PillPack’s revenues are minuscule relative to Amazon’s overall sales in the U.S, there will not likely be a significant near-term impact for Amazon. Standalone PillPack sales could perhaps add $200 million to Amazon’s top line over the next couple of years, but the longer-term impact will be much more significant. We have summarized the total pharmacy market size and the sales through the online and mail channels on our interactive dashboard for Amazon’s PillPack acquisition. You can modify various inputs to see how key inputs impact expected revenue contribution and growth.
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