In 1940, the late Karl Hanke took a job as a delivery boy at the Corner Drug store, an independent pharmacy in Woodland, California, bringing patients their medicines on his bike. He eventually joined the military and trained as a pharmacist before taking over the business.

“At one point we also had a liquor licence, so we delivered alcohol alongside prescription drugs,” recalls Lisa Shelley, his daughter, who bought the store from her father in 1999.

These days retailers deliver everything from clothes and groceries to flat screen TVs to consumers who order them online, in a shift that is battering traditional companies used to selling their wares in physical stores.

But something strange is happening in the US healthcare industry: the trend has gone in the opposite direction. Last year, around 88 per cent of prescriptions were filled at brick-and-mortar pharmacies, compared to 82 per cent in 2009, according to Goldman Sachs.

Amazon is hoping to change that with its first major foray into the $560bn market for prescription drugs in the US. It is paying roughly $1bn to acquire PillPack, a mail-order pharmacy that packages tablets into daily portions before delivering them by post.

PillPack specialises in serving patients who suffer from one or more chronic illnesses and therefore take a lot of medication every day. Although this group is small in number, it represents a lucrative part of the healthcare industry. Express Scripts, a large pharmacy benefits manager, says “super spenders” who spend $50,000 or more on medicines every year account for roughly 20 per cent of overall drug costs.

Still, few observers think Amazon will limit its ambitions to this corner of the market. Instead, they see its acquisition of PillPack as a chance to gain a toehold it can use to launch the kind of full-frontal assault that has become its hallmark.


Fall in Walgreens Boots Alliance share price on day of Amazon-PillPack deal

Michael Rea, chief executive of Rx Savings Solutions, which makes software to help people reduce their drug bills, says buying PillPack will allow Amazon to move more quickly than if it had launched its own pharmacy from scratch.

“This is a play for speed — it takes a lot of time and work to get a pharmacy started, and to get all the proper licensing,” said Mr Rea, a former pharmacist.

Eric Kinariwala, chief executive of Capsule, a pharmacy start-up, agreed. “They’re buying regulatory permits and contracts with health insurers, and that accelerates their market entry,” he said.

If Amazon hopes to apply its formula for digital disruption to the pharmacy industry, it will first have to work out why the proportion of people filling their prescriptions at physical drugstores is on the rise even as other trips to brick-and-mortar shops are falling.

It is certainly not because drugstore chains are nice places to spend time. Many of them are dingy places suffering from years of under-investment with long queues caused by understaffing.

One reason is that existing mail-order pharmacies are just not very convenient. Express Scripts, one of the largest operators, takes eight days to deliver after receiving an order, and up to two weeks for new prescriptions.

The process of getting a prescription filled in the US has also become more complex in recent years, as health insurers introduce measures designed to control soaring drug prices.

Many patients turn up to the pharmacy counter only to discover that the medicine they have been prescribed by their doctor is not covered by their policy, or that they must make an unaffordable personal “out of pocket” contribution.

More often than not, the drugstore will then ring the doctor’s office to find out if they can prescribe a cheaper alternative. Around 30 per cent of prescriptions result in a “pharmacy callback”, leading to more than 900m phone calls a year, according to a report from the US Department of Health and Human Services.

Although the back-and-forth process is often torturous, patients who attend a drugstore in person can at least try to make sure that they leave with their medication in hand.

[Pharmacies] are reinventing themselves by refocusing the real estate around population health and trying to become this stickier one-stop shop

If Amazon wants to expand the market for mail-order prescription drugs, it will have to solve these problems, said Mr Kinariwala.

His company, Capsule, is trying to tackle the “pain points” with software that allows the doctor and pharmacist to communicate more effectively. And the start-up has a team of couriers who deliver medicines to patients within two hours of receiving the prescription.

If Amazon can make the process of ordering drugs online quicker and less cumbersome, the biggest losers will be the large drugstore chains. Shares in CVS Health, the largest operator, had shed 6.1 per cent by the close of trading on Thursday, when Amazon announced the PillPack deal. Walgreens Boots Alliance’s stock price fell 9.9 per cent.

“Amazon is already eroding their retail business and this is definitely another threat,” says Ana Gupte, analyst at Leerink.

So far, the large chains have responded with plans to turn their stores into health clinics where patients can see a doctor or nurse before getting their prescription. Earlier this month Walgreens announced a partnership with Humana, a health insurer, to launch clinics for senior citizens. And CVS Health has said its $69bn acquisition of Aetna, another insurer, presages a push to turn its stores into “ healthcare hubs”.

“They are reinventing themselves by refocusing the real estate around population health and trying to become this stickier one-stop shop,” says Ms Gupte.

Not everyone is convinced the strategy will work. “Who wants to see their doctor in a drugstore chain?” asks Mr Kinariwala. “It’s an awful, uninviting setting.”

If Amazon succeeds in disrupting the pharmacy market, then more patients could soon get their medication delivered to their door — just as Corner Drug’s customers have been for all these years. Today the bicycles have been replaced by a pair of small city cars and the drugs arrive without the booze: “We sold the liquor licence in the 1980s,” says Ms Shelley. “It was worth quite a lot”.

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