Aimee Keane (00:04):
On a Thursday morning in late June of 2018, before the stock market opened in New York, investors in US healthcare companies woke up to some big news.
News_clip (00:15):
News out: Amazon in a new deal, uh, buying its way into the pharmacy business. It is buying PillPack.
News_clip (00:21):
The E-commerce giant is buying online pharmacy PillPack for $1 billion. This, according to people familiar with the matter.
News_clip (00:27):
What PillPack does is they package it for you in the dosages that you need.
Aimee Keane (00:33):
Amazon was buying into the pharmaceutical business, and as is often the case, when it looks like the e-commerce giant might be entering a new sector, the stock prices of the incumbent retailer sunk. In this case, it was the brick and mortar drug stores.
News_clip (00:48):
Shares of Walgreens, CVS, and Rite Aid. Each plunging on the news, collectively losing 12.8 billion in value at one point today.
News_clip (00:57):
I certainly understand the selloff, uh, in the company today because, you know, in some ways this is their worst nightmare. I mean, you know, you should be very, very afraid.
Christina Farr (01:07):
The whole healthcare system was basically impacted by this because Amazon was the one company that I think could seriously claim that they could do something big in the healthcare sector.
Aimee Keane (01:19):
But would they? Amazon had been quietly working on a few healthcare ventures for several years, but there were no signs yet of the company's trademark disruption.
News_clip (01:29):
I mean, do we have any sense of Amazon's broader ambitions in health? How did these pieces fit together?
Christina Farr (01:38):
Was it gonna be just they would dip their toe in the water and, and put some prescription medication offering up on Prime and call it a day, or was it gonna be something bigger?
Aimee Keane (01:49):
This is The Closer, the inside story of the deals that changed the world. I'm Aimee Keane. In this episode, how online pharmacy startup PillPack became a key part of Amazon's ambitions in healthcare and whether the tech giant will change the way we think about our own healthcare.
Christina Farr (02:14):
Hi, I'm Christina Farr. I'm a health tech investor with Omers Ventures, and for about four years I worked at CNBC, where I covered Amazon's foray into health, notably the acquisition of PillPack.
Aimee Keane (02:26):
Christina first came across PillPack in 2017, which she says were still the early days of digital healthcare. Entrepreneurs were testing things like wearable devices and mobile technologies to see if they could deliver a more efficient or improved form of care to patients.
Christina Farr (02:42):
There weren't nearly as many companies as there are today, and PillPack was definitely one of the more interesting ones from the get-go. They had a really strong social mission around making it easier for people to receive their medications, and the design was quite brilliant.
Aimee Keane (02:59):
Here's a clip from a PillPack promotional video.
Pillpack ad (03:02):
PillPack is a new kind of pharmacy. We package your medication and deliver it directly to your door. All you have to do is tear and take your next dose. Managing your medication has never been easier.
Christina Farr (03:14):
They had sorted them into these packages so that people who are on five or more medications, which was a lot of Americans, millions of Americans, would have a really easy way to sort through them.
Aimee Keane (03:25):
Here's how it works. You tear off a packet from a roll of presorted medication. The packet has the date and time printed on it, and inside you'll find everything you need to take at that time of the day. It makes it a lot easier to keep track of what medicine to take when.
Christina Farr (03:39):
So it just was something that even back then a lot of people were talking about and excited about.
News_clip (03:44):
If you filled one of the 4.3 billion prescriptions filled last year, you must pay attention to this online only pharmacy service PillPack. Have you heard about this? It’s disrupting the traditional pharmacy infrastructure.
TJ Parker (03:58):
And so it is really a radical departure from what we do today in pharmacy.
Aimee Keane (04:02):
The idea came from CEO and co-founder TJ Parker. For him pharmacy was the family business. Here he is in an interview from 2015.
TJ Parker (04:12):
I'd grown up in a family that owned your traditional mom and pop pharmacy on the street corner.
Aimee Keane (04:17):
This was in New Hampshire, and as a teenager, he'd work behind the counter and be out delivering prescriptions to people at home.
TJ Parker (04:24):
In that process, you know, everyone had this sort of cornucopia of pill bottles in their kitchen counter and this Excel spreadsheet that they'd crossed out and highlighted with all their medications on it.
Christina Farr (04:33):
He had this one elderly woman that he used to drop off prescriptions for, and she had really frail hands and very severe glaucoma. So her vision was failing. She just couldn't read the small print on the prescription bottles that he would bring her.
TJ Parker (04:49):
And I had to imagine there was a better way to do that.
Christina Farr (04:53):
He was just so struck by this that, you know, we live in this era of, you know, we're doing incredible things like putting satellites in orbit, having cars that drive themselves, and yet we still are using Sharpies on these pill bottles. So that was really his moment, his “aha” moment.
Aimee Keane (05:11):
Fast forward a few years and Parker's attending pharmacy school in Massachusetts.
Christina Farr (05:16):
And that's where he eventually started hanging out, kind of more and more at MIT, where there was a lot going on at the time with just entrepreneurship and especially kind of in the medical space. So that was where he ended up meeting his co-founder Elliot Cohen, who was a computer scientist from the Bay Area.
Aimee Keane (05:35):
Cohen had his own reasons for getting into healthcare. His dad struggled to manage different medications after a heart surgery, and like Parker, Cohen thought there had to be a better way to do it.
Christina Farr (05:45):
So the two of them met and bonded over this problem and eventually decided that they needed to start a company in this space.
Aimee Keane (05:53):
This space was the US prescription drug market valued at $330 billion in 2013.
Christina Farr (05:59):
This is a notoriously challenging space, not for the faint of heart. You know, it's an industry where just a few companies dominate.
Aimee Keane (06:11):
In fact, just five pharmacies control almost 65% of the U.S. market. There's another reason why the pharmacy market has been so tough to disrupt, and that's because of these gatekeepers called the Pharmacy Benefits Managers or PBMs.
Christina Farr (06:28):
These are the set of very big players in the U.S. that negotiate drug prices with drug makers on behalf of all the kinds of various forms of insurance companies that we have here. So there are very few companies that do that. Kind of notably, the big players are CVS Caremark and Express Scripts, and most of them these days are owned by large health insurance companies.
Aimee Keane (06:53):
Christina mentioned CVS Caremark and Express Scripts. These are two of the big ones. There's a third, it's called OptumRx. And together these companies negotiate most of the drug prices in the U.S. Now, in theory, their market share means they can command really low prices, really competitive prices from drug makers and distributors, but they're forever being criticized for not passing those savings onto the insurance companies, and then onto the customers having their orders filled at the local pharmacy.
Christina Farr (07:24):
And what PillPack was trying to do from the start was deliver medications to people's homes rather than having them wait in line at the pharmacy. And that was always going to be challenging because these big players, these PBMs, had their own mail order operations as well. And so the fear was that they could at some point kind of see this business as potentially competitive and might come after them. I think that's something that the co-founders of this business had in their minds from the very, very early days.
Aimee Keane (07:55):
After pitching the idea for PillPack at a hackathon in 2012, Parker and Cohen launched the company in 2013. It takes them a year to get their distribution sorted, which is a big regulatory hurdle for any company getting into this business. Each state requires a separate license for companies to ship medicine. And by 2014, they launched the PillPack online pharmacy serving 31 states. But they come up against another challenge shortly afterward.
TJ Parker (08:21):
As a business, we're in a really weird situation where we could deliver meds to people in their homes, we couldn't use online channels like AdWords and Facebook to advertise the service because of accreditation that you needed to do that. And so we were actually in a place as an online business, you know, a startup where we could deliver people meds but couldn't advertise to them.
Aimee Keane (08:38):
PillPack only has about 50 customers at first. So Parker and Cohen organized these staff pizza parties for their nine employees. There's pizza, of course, and the task of emailing friends and family, trying to get them to sign up for PillPack.
TJ Parker (08:53):
But then by the time we got that accreditation and turned the marketing channels on…
Aimee Keane (08:57):
Including Facebook.
TJ Parker (08:59):
It was really just a game changer for the business.
Aimee Keane (09:01):
And what a game changer it is. By 2015, the company shipped more than a million packages and the media is calling PillPack the pharmacy of the future.
Christina Farr (09:10):
And there were tens of thousands of people using it quite quickly. It really, really caught on and people really liked receiving these roles of presorted medications that PillPack was known for. One of the things that I found really interesting about them was they did quite well on Facebook, and that was definitely like a key kind of avenue for them for recruiting patients, but they did very well on cable television.
Pillpack ad (09:35):
Did you know 150 million Americans take medication every day? So each person has to stand in line at the pharmacy, sort their pills, and remember to fill their prescriptions over and over and over.
Christina Farr (09:52):
So when I was at CNBC I used to see the PillPack ads all the time.
Pillpack ad (09:56):
That's why we created PillPack. We're a new kind of pharmacy. We sort your medication by date and time and deliver it directly to your door.
Aimee Keane (10:04):
Facebook and daytime cable TV. These were great places to market to a key demographic for a prescription drug business. We're talking about people in their fifties and sixties who might be juggling multiple prescriptions.
Christina Farr (10:16):
It just hit a nerve. So I think at that point, they really did start to get some attention from some of the bigger players, the Express Scripts of the world, the pharmacy benefits managers that we talked about. Some of that was down to the potential competitive threat, and this was never something that any of these companies would acknowledge at the time. I think, you know, if asked, they may have said, you know, what's PillPack? But you would talk to PillPack about it, and they very much kind of always assumed that something would happen. And eventually it did.
Aimee Keane (10:54):
One of the big pharmacy benefits managers Express Scripts took issue with the way PillPack represented itself, saying it should be licensed as a mail order business, not a retail pharmacy.
Christina Farr (11:05):
Some drama certainly unfolded, and this was, you know, very, very bad news for PillPack.
Aimee Keane (11:16):
It's 2016. PillPack is at the time valued at about $360 million, having just raised 60 million.
Christina Farr (11:24):
Then disaster strikes, they hear that Express Scripts is going to be cutting PillPack out of its network overnight. So what does that mean? It means about a third of PillPack’'s patients who were using health insurance to purchase medications on PillPack would not be able to do so, basically overnight.
Aimee Keane (11:47):
Now, because of the way the US prescription drug market is set up, it's basically impossible to run a consumer-facing pharmacy without being in network with the big PBMs. Maybe PillPack could pivot to some other type of pharmacy business, but TJ and Elliot wanna help regular people with their prescriptions. And what Express Scripts is doing is an existential threat to that mission.
Christina Farr (12:09):
And for PillPack, losing such a massive chunk of its business could seriously be a death blow for this company.
Aimee Keane (12:18):
But instead of retreating Parker, Cohen and the PillPack team fight back.
Christina Farr (12:23):
When you look back at it, it was just a genius move on all fronts. It was a multi-pronged effort.
PillPack ad (12:30):
My name is Bryce and I'm from Texas.
Christina Farr (12:32):
They had all of their patients put out these videos that were like these really emotional campaigns of just why people loved PillPack. And those, they posted all over the internet with a hashtag “fixed pharmacy.”
PillPack ad (12:47):
I have seven different medications I have to take every day, and I was really tired of opening and closing bottles. Sometimes I neglected…
PillpPack ad (12:55):
It complicated my life. I thought there should be a better way. My son told me about PillPack, and I've been taking it ever since.
Christina Farr (13:07):
Those started to really pick up in terms of just getting traction. They would talk to the press, they were talking to me at CNBC, and of course TJ was just out there with this story of how this massive incumbent was basically a monopoly at the time and had come down on them as this kind of underdog startup company. And it became a David versus Goliath moment in the media.
News_clip (13:34):
No wonder you were TIME magazine's top 25 best inventions of 2014. TJ, good luck to you. You're solving major problems. Thank you so much.
Christina Farr (13:43):
Of course, we ate it up. We'd love these sorts of stories. And then the final thing they did is that they had some investors at the time who were able to reach Jim Messina, who was actually a former White House Deputy Chief of Staff under Obama. So he had a lot of these connections on the hill, and through him they started to call, you know, just, just politicians in DC and start to put some heat on Express Scripts and talk about all the problems associated with these pharmacy benefits managers.
Aimee Keane (14:14):
It was confrontation on all sides according to Christina.
Christina Farr (14:17):
From what I can remember at the time, they even called it a war room in the office. Every, every single person on the PillPack team was there 15 hours a day just fighting Express Scripts. And eventually facing all this pressure, Express Scripts backed down.
Aimee Keane (14:33):
In the end, this public fight between the two companies only lasts a couple of weeks.
Christina Farr (14:38):
And they were given a mail order contract, and this was the kind of contract that they needed to be able to continue to grow. And within two years they had become an absolutely massive company with tens of millions in revenues.
Aimee Keane (14:54):
And then PillPack starts to attract a few suitors. There's Walmart, drugmaker Novartis, but Parker and Cohen's advisors suggest they meet with one particular executive. His name was Nader Kabbani and he worked at Amazon.
Christina Farr (15:09):
And he had been at the company for about 14 years.
Aimee Keane (15:12):
He also happened to be a classical pianist who'd played with the Seattle Symphony a few times.
Christina Farr (15:17):
So just a really interesting guy. And he had just gotten this job as the VP of Consumables, and part of that remit was to think about kind of the pharmacy strategy. So he had the PillPack team come out and TJ Parker came. They start talking and just everything fades to the background. The two of them are really the stars of the show. And it was the way that Parker talked about the consumer experience and, think about that Sharpie and that poor woman who had poor vision. And he would tell stories like that, and it was, that was what Amazon needed to hear at the time. So the two of them just absolutely hit it off. And that was really I think the moment where the acquisition became very obvious.
Aimee Keane (16:04):
Amazon, particularly Jeff Bezos, was famous for calling the company “customer obsessed.” And that customer focus approach aligned with Parker and Cohen's mission for PillPack.
Christina Farr (16:15):
Think about it. I mean, at the time, Amazon was like an empire of goods. They had basically everything. And you can buy diapers, you can buy toys, you can buy anything you want, groceries, but the one thing they didn't have is prescription medications. So if you were this group of kind of early 30-something millennials with this passion for fixing pharmacy, and Amazon comes along and says like, we're gonna let you kind of build that product out for the first time and serve millions of people overnight. I mean, I think, I think that's a pretty compelling proposition. Not to mention the amount of money that Amazon was willing to pay for this company.
Aimee Keane (16:53):
That amount: almost a billion dollars, 753 million to be exact. This was the deal that sent healthcare stocks tumbling that June morning.
News_clip (17:05):
Shares of Walgreens, CVS and Rite Aid, each plunging on the news.
News_clip (17:09):
You know, in some ways this is their worst nightmare. You know, you should be very, very afraid.
Aimee Keane (17:14):
When we come back: what was Amazon really up to in healthcare?
Aimee Keane (17.24):
PillPack took prescription drugs out of the usual in-store pharmacy experience and brought it online, so naturally Amazon was interested. They had, after all, taken just about everything else out of brick and mortar retail.
Christina Farr (17:36):
You know, Jeff Wilke, who was running worldwide consumer business, said at the time that what this bet was about was really just saving people time, simplifying their lives and helping them feel healthy. So that was kind of the outward kind of strategy that they were willing to share back then. And Amazon, of course, was notoriously quiet about everything he was doing in the space. But I think the other part of it was just that PillPack was a company that had gone up against the incumbents and knew how to do that, had a playbook. And they knew that this would be deeply threatening to, you know, other players in the industry. So they needed a team that frankly had the courage and was fearless enough to be able to fight back.
Aimee Keane (18:23):
Amazon says it wants to save people time and to simplify their lives. And PillPack is established enough to help them do that with prescription drugs. It has the regulatory approval to ship medicine, and it's developed its own software PharmacyOS, which automates a lot of the routine tasks pharmacists and doctors have to manage. Here's another thing to consider: that's the value of a pharmacy customer to Amazon. At the time of the acquisition, the average PillPack user was worth $5,000 a year in revenue. Amazon's existing prime customers were worth just a fraction of that amount.
Christina Farr (19:00):
So, you know, Amazon couldn't have missed the fact that our population is getting older, richer, and sicker. That's been the general trajectory for years. And spending on prescription meds is insane in this country. It's about 500 billion dollars a year, and it continues to grow annually.
Aimee Keane (19:20):
For context, this is more per person than in any other country in the world.
Christina Farr (19:26):
And then you look at the picture of chronic disease in this country, and, and roughly 60% of Americans have at least one chronic illness, whether it's diabetes or heart disease or cancer. So Amazon has to be able to serve this customer, and tens of millions of people are on five or more medications in this country. Acquiring PillPack made all the sense in the world to me because this is the demographic that they need to be serving today and need to be serving tomorrow. And it was a quick way of basically getting into this space.
Aimee Keane (20:03):
So the deal closes TJ Parker's getting ready to move to both Utah and to spend some time in Seattle to continue running the company within Amazon. And before he leaves, he has a barbecue. Can you tell me a little bit about this barbecue?
Christina Farr (20:17):
Yeah, it was just a sweet kind of get together at the time. Nader was there, Nader Kabbani, and he was playing the piano and some of the key investors came along and brought their kids. And that was the way that they basically celebrated closing out the acquisition. It was just so low key, almost as if it was kind of a group of friends coming together. But then you remember, this was, you know, a near kind of billion dollar decision and that this was gonna make both TJ Parker and Elliot Cohen, tens of millions in the proposition of it coming together. But just that, that was kind of how they decided to celebrate this news, is just some veggies and some stakes on the grill and kids running around.
Aimee Keane (21:04):
And an Amazon executive on the piano. Then PillPack begins the tough task of becoming a part of Amazon. But to those on the outside, it didn't seem like much was happening.
Christina Farr (21:17):
There was a period of time where PillPack was operating kind of independently as its own brand. And so those of us kind of watching the company closely were wondering was it ever gonna be part of Amazon?
Aimee Keane (21:31):
Amazon had sent mixed signals to the market over the years about its ambitions in healthcare. It had launched and later shut down a telemedicine division. It did the same with this project called Haven, which was an employer health coalition with Berkshire Hathaway and JP Morgan. Analysts and investors were pretty puzzled by the company’s strategy.
Christina Farr (21:51):
And eventually they decided to launch Amazon Pharmacy.
News_clip (21:56):
Send you to Amazon. We've been waiting for this.
News_clip (21:57):
You're absolutely right, and we've been waiting for it. There is nothing that Amazon…
Aimee Keane (22:01):
It was the day a lot of people had been waiting for. In November, 2020, two years after acquiring PillPack, Amazon was officially launching a pharmacy business. The new service offered home delivery of a mix of generic and brand name drugs for customers in 45 states. And they had plans to bring the service nationwide.
News_clip (22:20):
I mean, they just continue to constantly be as aggressive as they possibly can be. And this is an opportunity in terms of pharmaceuticals that has been one…
Christina Farr (22:28):
So at that point it became very clear that PillPack was a core part of Amazon's health strategy going forward.
Aimee Keane (22:36):
But would Amazon become a proper threat to the healthcare industry?
Christina Farr (22:40):
I've always been cautiously optimistic and somewhat at times extremely skeptical about any of these big tech companies really doing something in healthcare. It's super complicated, it's regulated. There are corners of it that are run by, you know, a very small number of companies with a lot of power, you know, was it gonna be just, they would dip their toe in the water and put some prescription medication offering up on Prime and call it a day? Or was it gonna be something bigger?
Aimee Keane (23:11):
The answer as is often the case with Amazon was something bigger. In August, 2022 it goes on to buy a company called One Medical, which is basically a network of small primary care practices and telemedicine providers. It buys healthcare.
Christina Farr (23:27):
Which was a much even bigger acquisition than PillPack and caused even more of a splash.
News_clip (23:32):
We're shifting gears to a trending ticker this morning. Shares of Amazon on the move after the company entered an agreement to acquire One Medical in an all cash transaction that's valued at about $3.9 billion.
News_clip (23:45):
The deal, which includes debt, would add brick and mortar doctors' offices to the e-commerce giant's arsenal, marking a dramatic expansion of Amazon's healthcare ambitions.
News_clip (23:55):
Should a company with tons of data on your purchases also have tons of data on your health? And what will Amazon's business approach mean for patients?
Christina Farr (24:06):
So then I started to kind of put the pieces together and think, okay, they've got pharmacy, they've got primary care through One Medical, they also have referral networks and to health systems, and they have access to seniors with both companies. So something bigger is coming together, and I don't think we know yet kind of what that will ultimately look like, but it feels like what we could be moving towards is a service that resembles what I like to call the front door for medicine. The first kind of place that you can go if you need anything from a healthcare perspective.
Aimee Keane (24:45):
A front door to medicine, instead of having to piece together every aspect of care, think of doctors in different networks, not knowing whether insurance will or won't cover a procedure, finding the best price and availability for your medication. Perhaps, it could all be organized by the one company that's transformed online shopping. How long do you think it might be before Amazon or some other equally ambitious enterprise sort of creates that front door?
Christina Farr (25:14):
It's gonna take time. A lot of this stuff is hard. I mean, even just finding out how much things cost is hard. Simple stuff. Like, you know, think about the last time you went to the doctor and asked like, like how much am I gonna have to pay for this? Nobody could tell you and then you get a bill in the mail weeks later, that's still the state that we're in. And so I think it's gonna take some time for a company to be able to come along and say, this is the cheapest option, this is the most convenient option, and we will navigate you based on whatever kind of insurance you have, if you even have insurance at all. That's, to me, like what they need to build, but it's gonna take, I think, more acquisitions, more integrations, more partnerships, just a lot more work to get there.
Aimee Keane (26:00):
To a place in the three trillion healthcare industry. So before anyone gets their hopes up that Amazon can fix healthcare for us. Christina, can you tell us how this might not actually work?
Christina Farr (26:16):
There's lots of things that could prevent them from doing it. There's regulatory attention. This could be perceived as anti-competitive. We could also see some ongoing pushback from competitors in the space who, if Amazon does decide to do something even more ambitious, I think, you know, may have something to say about that. And those are the macro things. And then of course, you know, on a micro level, it's do they hire the right people? Do they bring in experts from the healthcare industry or do they have a bunch of engineers running this that have never kind of worked in the space and have no idea what they're doing. Now that they've kind of put themselves out there and said, we're doing this, expect to see kind of more and more from them in the next few years.
Aimee Keane (27:00):
What about TJ Parker and, and Elliot Cohen? Christina, where are the co-founders now?
Christina Farr (27:05):
They, as far as I know, have stepped out of Amazon. They stayed there for about four or five years, worked on Amazon Pharmacy. A new team has taken over. It was sort of unclear under what terms they left, but, you know, I had noticed that it was about four years after the acquisition, which is in the industry kind of parlance that the four year cliff. So it's at the point where, you know, you've basically stayed long enough to be able to vest whatever kind of equity you've been given as part of a transaction. They are entrepreneurs at heart, so how long they were gonna stick around at a big corporation was always kind of up in the air. And Elliot and TJ seemed to just be hanging around, like thinking about their next thing, doing some investing here and there. And I think the industry is kind of waiting around and seeing, seeing whatever they're gonna do next and, and probably waiting to write them a check.
Aimee Keane (28:09):
That's it for this week. Thanks for listening. If you like this episode, would you please leave us a review on Apple Podcasts, or better yet, share the show with someone who might enjoy it. And hit that subscribe button so you'll know every time we have a new episode. We've been asking you to send us your best deal stories and now we have a new question for you. What's the most underrated deal in M&A history? Maybe it's one you followed really closely that's been forgotten in the last few years, or maybe it just didn't get much coverage at the time. You know how this works. Send us a voice memo with your first name and where you're from, and then in just a few sentences, tell us what the deal was and why you think it matters. You can email your audio file to hello@thecloser.fm.
(28:52)
We'll review all the submissions and we just might play yours on a future episode. Now, if you want more from The Closer, we have the newsletter for you, go to closer.fm to sign up. It's written by journalist and Closer producer Ben Walsh and it's witty, informative, and the place where he's gonna dive into the mechanics of M&A and analyze deals in the news. You'll get a chance to see show notes from each episode and much more from our team. So just sign up at closer.fm. And if all of this isn't enough, you can also become a Brazen Plus subscriber on Apple Podcasts for exclusive access to extended interviews and other bonus material from the show.
(29:37)
The Closer is a production of Project Brazen in partnership with PRX. Our show's produced by Isabelle Kirby McGowen and Ben Walsh. Sidhartha Mahanta is our editor. Mariangel Gonzalez is our project manager, and Lucy Woods is our fact checker and head of research. Golda Arthur is our showrunner, and Bradley Hope and Tom Wright are executive producers. At Project Brazen, Francesca Giardi Quadrio Curzio and Nour Abdel Latif are podcast strategists. Megan Dean is programming manager and Ryan Ho is Design Lead. Thanks to Eric Gomez for audio engineering and sound design, our composer is Alex Garcia Amat. I'm Aimee Keane. Thanks for listening.