How Amazon throws a big bomb to the pharmaceutical industry in the U.S.? ---- An insight of PillPack, a medication delivery company in the U.S.
Writer: Christiane Zhao
It is an ordinary night like the other nights. I went to the Wholefood supermarket before I go back to my apartment. I was waiting on the line, and I keep seeing the former one scan a QR code and get a discount for her check.
"What is that?"
"Oh, it's an Amazon Prime membership."
Okay, so I assume the first thing to do is to get an Amazon Prime membership online. To get a supermarket discount and two free prime member shipping, I registered for the membership, eventually. It does take some courage to share your daily routine, your online shopping history, home address, and now, your supermarket glossary list and medical insurance or prescription to the company. I said that for a reason ---- A PillPack advertisement was sent to my mailbox within seconds.
"Our service is free,
you only pay for your medications.
PillPack could change the way America takes its medicine."
I am just one of the Prime members who got the message. It is still unclear how many people received email marketing or how Amazon targets its users, as approximately 100 million-plus members reported they did not receive any early messaging. It also remains unclear which individual is involved in Amazon's initial PillPack marketing wave. Not surprisingly, this mysterious body has chosen a semi-transparent pill bag as its eye-catching symbol.
I opened the hyperlink in my mail, what first comes into my eyes is ---- A human hand is holding a semi-transparent pill bag. A few big dark-blue words in Times-Roman font style written on the left-hand sides: "Your medication, delivered." A hyperlink provided below is expecting to direct you to an advertising video. Amazon is expected to explain the entire pharmaceutical services by 35 seconds. The scene is covered by a light-blue background, which seems to make their services trustworthy and transparent. For those like me, who had never heard about PillPack, it marked itself as a full-service pharmacy that fills prescriptions send ships drug package. Packages are in the pre-sorted dose and are placed in a dispenser.
This caught my eyes. Medication-delivery is already a mature concept, but it is still an unreachable dream for the majority of the population in the world, including New Zealand. This became an even more exciting mystery that I would like to explore to. The attractive side of this story is when you know how contradictory and complicated it can become; and how difficult it is to drive changes safely while dealing the traditional players. However, everything has simplified in the PillPack's website. Your prescription drugs or supplements will be on your door by a few clicks only ---- You can transfer your pharmacist and personal prescription by only eight steps only, and most of them supporting with auto-search. The zero shipping cost plus increased convenience is more than just a slogan since Amazon since it purchased PillPack, a drug delivery services company, in mid-2018 for $753 million.
Amazon is making a big push to the $3 trillion healthcare market. For PillPack, it is approaching a market with $500 billion per year and growing up 7% annually in the United States, and this number only includes prescription medication(IQVIA). While PillPack has mainly focused its eyes on chronic-conditions and multi-dose medications, we are having approximately 60% of American adults have at least one chronic illness, and 40% with two or more (Centers for Disease Control and Prevention). It is precisely just like what Bezos is expecting -- Big money return and acts as a strategic supporting point to grow its empire in the healthcare market.
Amazon is having this on-again-off-again interest in healthcare. It is not Jeff Bezos's first time of getting involved in this market. Back in 1999, the company bought a 40% stake in DrugStore.com, and he was one of the board members. Drugstore.com ended up bought by Walgreens for $429 million in 2011, which shut down five years later. Bezos emphasised in a Shareholder letter in April that the company is still a smaller player in the global retail, but he will not hold back from taking opportunities to grow. It seems to be true that Amazon is expected to draw customers, including its Prime members, away from the 64,500 retail pharmacies in the U.S..
Amazon has been quiet since the acquisition, but it is clear that a protracted battle has triggered between the old guard and the new. It won't be an easy battle for Amazon to win.
This e-commerce beast's entry does threaten the brick-and-mortar pharmacies. CVS, Rite Aid and Walgreens, which operates more than 20,000 stores in the U.S., collectively lost more than $11 billion in the stock market on the day of Amazon's announcement, said by Adam J. Fein, president of Drug Channels Institute. Those large, traditional retailers have long dominated the $413 billion annual U.S. market for filling prescriptions. PillPack is also a common enemy for the pharmacy benefit managers (PBMs), which always act as the industry middleman. PBMs earn up to 50% of its profit from distributing drugs to their patient directly, said by Roos Muken, the Evercore ISI analyst.
However, PillPack needs relationships with them. PillPack is dependent on PBMs to get paid by the patient's insurers. Those PBMs is not only PillPack's competitors but also the gatekeepers to control the access of patient data and insurance payment. Surescripts, which is owned by CVS Health Corp. and Express Script, is having a network connection to most of the U.S. pharmacies and PBMs. It also has the most comprehensive databases of prescriptions, including those written on papers.
In early August, Surescripts publicly accused PillPacks of fraudulently receiving patient data. The latter one is currently retrieving medical histories of its customers through Surescripts database via ReMy Health Inc.. In the United States, doctors and hospitals need to enter the government-issued National Patient Identifier to retrieve the data. However, ReMyHealth did not include PillPack's NPI when retrieving data from Surescripts database. Tom Skelton, CEO of Surescripts, claims that they do not allow pharmacies to access to patient's medical history. In response to that, PillPack spokeswoman Jacquelyn Miller denied any wrongdoing as the company receives patient authorisation online during the registration.
Back to 2016, Express Scripts accused PillPack of misrepresenting itself as a retail pharmacy and taking movements to block its members from using PillPack's services. It ended up being allowed to stay in the Express Scripts network as a mail-order pharmacy.
The story did not end. Based on an article published in early August, CVS and Walgreen are rejecting the prescriptions transfers request from them to PillPack. Two claimed PillPack did not receive proper consent from the patients. They did not intentionally decline the transaction, but they did not receive approval by calling the patients to confirm the transfer request. It is also reasonable to question the way that PillPack collects a patient's consent by a single click. Douglas Hoey, the CEO of the National Community Pharmacists Associations, also states that there are 20 to 30 pharmacists reported they receive a request from patients never authorise the transfer.
The local retailers are desperately looking forward to providing customers with new reasons to visit their store and pick up the prescriptions. Both CVS and Walgreens are remodelling hundreds of local retailers to targeted at the customer with chronic illness, and give the customer more reasons to visit them. Walgreen is considering to enable after-hour prescriptions pickups. Walgreens also established partnerships with numerous companies to monitor patient's health and behaviours in the past years. While nearly 90 % of all dispensed medication of generic, it does not make up high-profit margins. However, medication delivery can cut down local retail's traffics and sales dramatically. Based on an article published in the Wall Street Journal, customers use the pharmacy can have an average of 2.3 times visit a week to the store and spend $66 on groceries and $26 on prescriptions. However, for customers who don't use the pharmacy, only spend $24 weekly on groceries with less than one visit per week. CVS is also playing down the online threats by struck a deal with U.S. Postal Service for medication delivery. Customers will be charged $4.99 per delivery.
Not surprisingly, PillPack and Amazon are not fighting with empty hands. In contrast, there are plenty of reasons to clarify the threat on the traditional players. Amazon's PillPack has pharmacy licenses in 49 out of the 50 states. It also owns five distribution centres in New Hampshire, Austin, Texas and Miami, which means it can ship medication to almost every state. Its rich-in-assets and comprehensive team structure enable PillPack raised roughly $118 millions in private capital before its acquisition by Amazon. Despite the fact that Amazon has deep pockets and unlimited ambitions, Amazon's same-day delivery services plus PillPack's adherence packaging, the service became even more attractive than ever.
It is not possible to understand PillPack without looking at the team behind. T.J. Parker, who remains as the CEO of PillPack before and after the acquisition. Grown up in his father's pharmacy in Concord, New Hampshire, he worked in the pharmacy since 16. His dad later also became one of the first pharmacists of the company. During his time in college, he also met two other important men who settled the foundation of PillPack in next few years. He partners with Elliot Cohen, an MIT engineer and investor. In 2013, they won an MIT competition and got the first angel investment. Then the company also quickly gather several rounds of venture capitals. By July 2013, PillPack had already raised just over $4 million in funding. When its online pharmacy first launched in February 2014, the company only has 50 customers and nine employees. In the first few years, PillPack experiences difficulties. The cost and effort to file for license and the misinterpretation of Google and Facebook make the company became quite struggle in both maintaining a flow and marketing to expand the market. PillPack was faulty being labelled as a drug manufacturer. An investment changed that --- Kevin Colleran, an early member of Facebook's ad sales team, helps to clarify this misunderstanding. Facebook became an entry for PillPack to reach more customers than ever. Customers continuous to route over --- by the end of last year, it generated $299 million in the annual avenue.
PillPack is just a piece of Amazon's big move into the healthcare market. However, healthcare is not just delivery medicine in a timely manner. The well-structured pharmaceutical structure and isolated parties can also add up complexity and issues among the way. While PillPack is also facing pressure from other traditional players in the market, they are also experiencing pressure from other medication deliverers. There are the flip and downsides of PillPack integrated into Amazon. It is also true that PillPack will not be happy to have Amazon as an enemy, especially if they are burning quite a large amount of money to develop the new pharmacy operation system. Players like PillPack can also mean the changing of dynamic in the healthcare system, as well as patient behaviours and lifestyles.
"The pharmacy world is much more complex than just delivering certain pills or packages. I strongly believe that the role of the physical pharmacy will continue to be very, very important in the future."
---- Stefano Pessina, Walgreens CEO
* PillPack's official website design changed when I published this article. From a human hand holding a semi-transparent medicine bag to a medicine bag only.
*This article is a concluded analysis of PillPack based on the articles in trustworthy websites such as CNBC and WSJ.
The 8 Steps to register for PillPack's service:
*In Sep 2019
Investment in Health Tech project in New Zealand. -- Interview of Mitali Purohit, Network Manager at Icehouse Ventures
Writer: Christiane Zhao
Christiane: During the video interview, you had mentioned “International potential” in venture investment for several times, why you think it is so important from an investor’s perspective?
Mitali: Because for the angel investors or early-stage investors, they are looking at ten to thirty times on Return on Investment. If New Zealand’s technology harnesses the local market only, it is difficult to see the Returns on Investment due to its limitation in geographical spaces. Sometimes it is also hard if you are only limited to the New Zealand and Australian markets. So, given the healthcare technology, medical technology or even simply software development, it requires a lot of investment by locals and overseas, and it is natural to think their services and products should be geared towards an international market. Thus we can get the returns, and you can also have more users from overseas to validate your products.
Christiane: Of course, I strongly agree with your opinion. During our video interview, one of the questions I asked is “Do you think AI-health project has a future in the New Zealand investment market?” You say yes. I have also done some research about it, which makes me not very confident to give a yes to this question. Because we have a relatively low population density, and we also have a public healthcare system. So, do you think it is easier for us, as investors, to say no for an AI-health startup to balance out our risk and return?
Mitali: I agree that the New Zealand market is quite small, but we need a fair amount of data points to develop an AI model that is accurate and useful. You will need data to make sure the algorithm is accurate and working. That’s why we go back to what we said: Does this have global potential ? For instance, a company can partner with companies overseas to develop a product that is accurate, usable and investible. It enables the company to scale up internationally from there. So, when I say yes, I mean this is a market that is worth for investment. However, if it is too local, it is not seen as worth investment. In the case of AI-healthcare, we also got so many different categories. For example, a model can be used to improve hospital admission efficiency. However, in New Zealand, every hospital has different IT systems. So imagine if you develop a similar product for the New Zealand market, it will be hard to launch. As an angel investor, you would like to know if there is market demand for this product. But if every single user is different, you cannot guarantee the technology will be picked up quickly by the majority.
Another thing is the procurement system within each healthcare buyer (hospitals etc). There isn’t much funding/budget available to take up new technologies regularly within hospitals and clinica, and it takes a long time for the system to adopt a new product. In general, if you only look at the AI-healthcare market locally, it is not investible. But if you have something like, say, using Avatars ---- digital human to provide consultancy around mental Healthcare or digital nurses to triage hospital admission, those aspects are more comfortable to develop, as you can generate data quickly, and the product could be adopted globally. So, we shall break down the AI technology application into different segmentations, and then we invest in different areas based on its characteristics and performance. Therefore, it is not just a straightforward yes or no question.
Christiane: Could you please kindly explain the process of applying for funding? As you know, many students might not have many ideas about how it works.
Mitali: The best thing to do is to find the investment group and go over their websites. Look at their investment criteria and see whether it is suitable for your project before you approach them. The New Zealand investment community is very small, and the people are amiable. You can contact their managers of those investment groups or funds. All angel investment grounds in New Zealand are listed on Angel Association New Zealand’s website. In general, you will need an investment presentation which covers the product, its application, market potentials, targeted problems to solve, the approaches to solutions, and more. It will be helpful if you go and chat with those companies before you start your application. Once they have some interests, they will guide you with what they are looking for. Usually, a team is essential for a startup. For instance, there is a medical startup that came to us about nine months ago. The technology is excellent, and there are significant market needs for this. However, there are only professionals in medical science and sciences, but no entrepreneurs. Therefore, we advise them that they need someone commercial to run the business. They came back to us later, and we invested in them.
Christiane: You had mentioned, we got 11 angel investment groups in New Zealand during the video interview, but we do have any venture capital groups(VCs) in here. Could you please explain why?
Mitali: Because angel investment probably only have ten years of history in New Zealand. By now, we have enough deal flows of companies, which we invested in ten years ago, which are now starting to look for more massive amounts of money from VC funds. There are also a few VCs from overseas are planning to enter the New Zealand market soon. Besides, angel investment is different from VCs. Angel investors usually give support to startups at the initial moments, but VCs typically come in to support growth. It generally invests in a later stage with a more considerable amount of money invested. Given the maturity of the New Zealand market, we have more capacity for the VCs to get involved nowadays.
Christiane: Are there a lot of foreign investors at The Icehouse?
Mitali: We have many investors that are based overseas, especially those entrepreneurs who are growing their business in the States, Europe and Asia. They are willing to support the New Zealand startups now, as their journey as entrepreneurs could be entirely meaningful to them. We have connections to local and international investors, business mentors, and VCs. We also have investors from the significant funds which supports companies to grow internationally. It is also an advantage of partnering with The Icehouse Ventures because we can provide local investment as well as connections into overseas investment. Icehouse Ventures has a good brand and reputation overseas, so it makes it easier for us and our start-ups to reach out to international networks.
Christiane: From your perspective, what are the challenges for the Icehouse Ventures?
Mitali: The biggest challenge could be finding a suitable team and experienced entrepreneurs to make an idea became a reality in the international market. Sometimes we see a great company and its great founders, but we often do not see the complete team. In relation to Healthcare, we did not see enough. There is not enough funding going toward medical technology at an exit point, which is when the company is growing, and this idea is waiting to be sold. The biggest challenge is that we do not have enough investment opportunity in the healthcare sectors that have international scale.
Christiane: We saw a lot of small healthcare companies in New Zealand, and some struggled a lot after a few years since they got established. Do you think it is a prevalent case in New Zealand that we have a lot of healthcare and technology startups?
Mitali: A core part for the healthcare startups is about infrastructure integration -- can you develop a technology that can be quickly adopted and used by the current healthcare infrastructure. It is hard for a healthcare startup to scale big in New Zealand. For instance, Fisher & Paykel is one of the biggest healthcare-related companies locally, but it is only one-of-many large payers internationally. We do need the infrastructure and research funding to support these startups. Besides, we do not have a lot of large corporates to assist them to grow. Healthcare Technology requires a large amount of research funding to support, but we do not have enough funding to leverage it. Consider other areas, such as IT technologies, software and engineering. You only take a little bit of initial investment with a given market of users. It can further grow and request approximately $2-7 million worth of fundings, which support you the next stage. However, when you look at Healthcare, you might need at least $10 million at the initial step to be able to scale.
Christiane: So, when we look at places like China, Japan or the United States, sometimes we do see some new startups that can challenge the status quo or even the business models of the big, mature companies in the industry. Do you think that will ever happen to New Zealand?
Mitali: Well, it can only possibly happen with enough of R&D investment and private sector working well together to build a start-up and corproate ecosystem. If yes, then I think so. Israel, which is a similar size to New Zealand, has done this! But as you know, you need the money and people to do this research and go through the initial business stage in New Zealand. We need to provide enough support from research facilities, but there is still a gap between science and computer technology. There is more to do on this front.
Christiane: What about balancing the risk and return for the healthcare technology market? It is possible that we invested so much at the beginning, and it turned out to be nothing.
Mitali: Yes, but you can also receive higher returns in the medical and Healthcare market if the product works out. I think the critical point is to have more awareness of how the markets operated overseas. Who are your potential buyers of these startups for exit, so we can see returns flowing back to NZ to fund other start-ups in this area? If you get the profits, the multiples are higher than a software product (fingers crossed). To balance the risk and return for the health-tech sectors, you would need an in-depth understanding of the technology as well as the environment it is applied in. It really helps when you have an experienced entrepreneur who has taken a healthcare technology through to market in the team.
I also worked with a lot of female investors through ArcAngels. The general feedback is that the biotech market can be high risk, but the social impact of a company could be a necessary aspect to consider and add up the bonus. First, I am expecting to get my financial return, and second, I am also expecting that the investment subject is bringing an impact to the local community, national and international market. So, there are a lot of them who are taking risks. However, we have a limited pool of investors in New Zealand who understand biotechnology or healthcare technology. As we see more successful healthcare companies giving investors the return, the confidence will build.
Christiane: I am aware that you are interacting with a lot of female investors and entrepreneurs in New Zealand. Do you think there is still gender inequality in the investment industry?
Mitali: I would not say “gender inequality” in purpose, but we do not see many female investment managers, investors or entrepreneurs in the New Zealand market. The Angel Association New Zealand did a review last year, which states that there are only 18% of the investment are from female investors and 18% angel investment went to female founders. The quality of our women-led companies in NZ is exceptional. The concern is that we don’t have enough. The common theme we hear is, women founders who have great ideas don’t know where to start, or do not have mentors to support them through the start-up and fund raising journey. When we have more female investors and mentors in the community, we could see more women founders coming out and pitching. Internationally, we are starting to see more groups encouraging and empowering female investors and founders. We also know that women have a different way to target an unsolved problem. We also see that women investors have a greater understanding of the market reality since the female consumer is mainly contributing to product sales in the market. In regards to Healthcare, a female member could act an even more critical role. They are still the primary carer of both the family and in traditional healthcare settings, so they can assess these investment opportunities more thoroughly. Therefore, we will need more female researchers standing out and more female investors to help bridge this gap. It enables us to align the financial returns and long-term views.
This interview article is a follow-up Q&A session after the video interview. If you would like to watch the video, please visit www.vimeo.com/caretechdia
* All rights reserved by Christiane Zhao and the interviewee.