Amazon moves into the prescription business

Amazon's purchase of US firm Pillpack seems to represent the kind of move that we have seen before from the online giant. Once it has identified an area of potential growth, it either takes over a firm in that zone or moves in with its own infrastructure, undercutting existing firms by offering lower prices. This strategy is underpinned by the wonderful cash generation abilities of the Amazon Web Services division, which gives Amazon CEO Jeff Bezos and co. the ability to rapidly displace its rivals.

Will online pharmacies now go the way of bookshops, losing out to a firm with deeper pockets? Certainly a competitor to Amazon will have a difficult time matching the resources the firm can throw into any sustained campaign.

But Amazon’s triumph in this sector is not a given. Pillpack gets its products from AmerisourceBergen and Walgreens, and the latter is attempting to buy the former. This could be a potential problem should Amazon opt to battle Walgreens for dominance. Amazon’s new pharmacy may find it difficult to strike deals with some firms offering drugs, since it undercuts their own service.

In addition, Pillpack is a very small player. Pillpack’s sales last year were around $100 million, compared to $34.3 billion at Walgreens. Walgreens succeeds because it has a health plan that allows it to issue prescription drugs. Amazon would either need a pill plan or a pharmacy benefit management system that would offer a means of offering drugs through prescription plans.

This market is already under pressure, causing a reduction in margins. It would also increase the regulatory burden, so while Amazon would derive advantages from integrating the Pillpack business with its Prime offering, it would face increased costs.

The Pillpack acquisition is a first step, but it is only that. More infrastructure and possibly an additional merger and acquisition (M&A) is needed to secure Amazon’s place in the online pharmacy sector.