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Stock Analyst Update

What PillPack Purchase Means for Amazon, Healthcare

The online giant gains a foothold within the pharmaceutical supply chain.

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The other shoe finally dropped: Amazon (AMZN) is buying online/mail-order pharmacy PillPack.

We see Amazon's acquisition of online/mail-order pharmacy PillPack as a logical way to further its push into the pharma category while offering layers of potential synergies. PillPack, which generated around $100 million in revenue during 2017 according to PitchBook data, distributes presorted medications in personalized packages while offering services such as 24/7 online pharmacist support. From Amazon's perspective, acquiring PillPack could resolve some of the regulatory hurdles the company would face in building out a larger mail-order prescription business (PillPack CEO TJ Parker has previously stated the company is licensed across the continental United States). However, PillPack also offers a new source of customer data that could be utilized for future cross-selling opportunities (both online and in physical stores) or the new Amazon/ JPMorgan Chase (JPM)/ Berkshire Hathaway (BRK.B) partnerships, build out new Prime membership pricing tiers or other subscription-based services, as well as inroads into other business-to-consumer verticals (including digital health platforms and wearable technologies)--each of which would be positives to the network effect and intangible asset sources underpinning our wide moat.

Terms of the transaction were not disclosed, though Tech Crunch reported that Amazon's purchase price was "just under $1 billion" (and more than Walmart (WMT) reportedly bid last month). The acquisition won't have an immediate impact on our $1,900 fair value estimate, as we expect the integration process to be somewhat gradual as it manages relationships with PillPack's existing PBM relationships. Our medium-term assumptions--including average annual revenue growth of around 23% for the five years ending 2022, with GAAP operating margins approaching 7% over the same period due to contribution from AWS, Prime membership fees, third-party sales, and advertising services--remain intact, though we acknowledge the opportunity for both top and bottom upside from this deal.

However, we also believe it will still be tough for the Amazon to create any major disruption within the healthcare space given the insurance dynamics that drive the market. From our perspective, any new competitor will need to deal with the large and powerful customers. Despite what some market participants believe, the true end customer in the pharmaceutical space is not the consumer of drugs, but rather the insurer/employer/government that pays for the health benefits of the consumer. Accordingly, the expertise needed to profitably navigate the space precludes an easy opportunity for new entrants. We believe the current downward stock price move from fears of new disruptive competition for the drug space creates an opportunity for investors to acquire the solid moaty firms of drug wholesale and PBM industries at discounts.

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R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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