What happened
Shares of major pharmacy chains CVS Health Corp. (CVS -0.77%), Rite Aid Corporation (RAD -25.00%), and Walgreens Boots Alliance Inc. (WBA -2.16%) sank by 9% or more as of 11:07 a.m. EDT on Thursday. All three stocks were impacted by the same big news: Amazon's (AMZN -1.25%) acquisition of PillPack.
Amazon announced on Thursday morning that it had entered into a definitive agreement to buy PillPack, an online pharmacy with licenses in all 50 U.S. states. Jeff Wilke, head of Amazon's worldwide consumer business, said that the internet retail giant wants to help PillPack "continue making it easy for people to save time, simplify their lives, and feel healthier."
Image source: Getty Images.
So what
Reports surfaced over a year ago that Amazon was exploring the possibility of entering the pharmacy market. However, the big pharmacy chains appeared to have gotten a break in April with rumors that Amazon might be staying out of the prescription-drug business after all. The acquisition of PillPack, though, means that Amazon is now likely to compete directly against CVS Health, Rite Aid, and Walgreens.
The impact of Amazon's deal could be significant. Millions of customers buy other products through Amazon because of the convenience, low costs, and quick delivery that the company offers. With PillPack, Amazon gains a team with extensive pharmacy industry experience. PillPack is also already in the networks of most major pharmacy benefits managers and major Medicare Part D plans.
However, some pharmacy chains might not be as affected by the entrance of a big new competitor as much as others. CVS Health has already begun to implement a home-delivery program, offering next-day delivery from all of its stores and same-day deliver in certain major markets. Wall Street analysts immediately dubbed this the company's "Amazon strategy" when CVS announced its plans in late 2017.
Walgreens Boots Alliance CEO Stefano Pessina stated in his company's earnings call Thursday morning that he isn't especially worried about competition from Amazon. With its purchase of a big block of Rite Aid stores, Walgreens now has more than 13,200 retail pharmacies in 11 countries. Pessina views PillPack as a small player that can't match Walgreens' scope of operations, and he appears to doubt how well Amazon will be able to manage the complexities of the pharmacy business.
Rite Aid, on the other hand, is much smaller after selling 1,932 stores to Walgreens. The company doesn't have the economies of scale that its rivals have -- and those rivals could soon include Amazon.
Now what
Amazon said that the PillPack deal should be finalized in the second half of this year, pending regulatory approvals. It could be well into 2019 or even later before Amazon's presence in the retail pharmacy market begins to be felt.
However, investors shouldn't ignore the disruptive potential that Amazon could bring to the retail pharmacy industry. Selling prescription drugs is certainly a highly regulated business that's very complicated, but Amazon has the financial resources to quickly gain the expertise it needs to navigate any hurdles.
CVS Health, Rite Aid, and Walgreens Boots Alliance could find themselves fighting a different kind of battle in the future. Investors might want to be wary of the stocks of any of these major players that don't take the threat from Amazon seriously.
