Q1 2022: the outlook for e-pharmacies

Although e-pharmacy’s biggest competitors are still by far the brick-and-mortar incumbents, a former director at Alto Pharmacy told us that competition is heating up at the “second tier” e-pharmacy level, signalling that these players are gaining ground. “I would say yes, in terms of these legacy pharmacies, are they worried? They’re definitely worried.” 

Initiatives such as billionaire Mark Cuban’s Cost Plus Drug Company are also pulling on the cost and convenience levers, offering generic drugs at cost plus a 15% markup to account for administrative and fulfilment expenses. “You see Amazon Pharmacy trying to do the same, because they have a GoodRx-like programme for Prime members to lower the cost of their medications, and I think that that is going to be the only way to get people to shift from one pharmacy to another,” a former VP at PillPack said.

Despite the rising profile of e-pharmacies, the expert said a “major” shift has not yet happened, citing a number of factors. “When you think about Capsule and Alto and Amazon Pharmacy, if you put all of those together, it’s still a very small share of market, and I think the reason for that is that many of the large players have just caught up in terms of convenience, which is really the main lever a lot of these pharmacies have to pull.” 

They added that switching from one pharmacy to another is still “relatively high-friction”, with many of the major retailers requiring that customers do all the heavy lifting, which is particularly cumbersome when multiple prescriptions from various providers are involved. It can also be challenging for e-pharmacies to quote prices to customers before they make the move, as claims cannot be made without a prescription. Customers may therefore end up being charged more by Alto than they were by CVS, for example, which causes immediate (and irreversible) churn. There is also a potential threat from nascent digital health players, such as Thirty Madison, Hims & Hers and Ro, if they are to expand into regular prescription medications. “The advantage they’ll have is they already own the customer.” 

At this juncture, the former PillPack VP sees acquisitions as a “very real scenario” among the e-pharmacy names, particularly given the capital-intensive nature of those businesses and as retail pharmacies play digital catch-up and try to mimic their model. We were told mergers among the e-players themselves are less likely, however, as there is already a considerable level of technology overlap, and the combination of any two is unlikely to become a dominant force in terms of pharmacy market share. The former director at Alto also sees the industry as having reached a scale that is attractive to strategic buyers. This could be Amazon, which lacks a retail pharmacy presence, Walmart, which has “deep pockets”, or a legacy incumbent such as CVS or Walgreens, which “certainly are lacking behind in terms of the digital presence space”. We heard that IPOs could be on the cards in the future, but that profitability is still a challenge for many of these companies, and thus acquisitions are more likely. 

Ultimately, we heard that pharmacy benefit managers (PBMs) are still the dominant players in the entire pharmacy ecosystem, controlling contracts, the price of the medication and relationships with wholesalers. “Until someone can figure out how to disintermediate those PBMs, it’s going to be very hard for there to be really tangible, dramatic changes in the way the pharmacy ecosystem works,” the former PillPack VP said. Another trend over the next 12-18 months could be direct-to-consumer health players partnering with virtual health consultants and companies like Truepill for prescription management. “COVID helped accelerate [that] quite a bit and now I just think that people are generally moving in that direction,” the specialist said.

Although there has not been a major shift to date, the COVID-19 catalyst and a growing cohort of younger, tech-savvy consumers are expected to increase e-pharmacy adoption in the long term. While Forum Interviews suggest that patients still enjoy the flexibility of brick-and-mortar pharmacies, the e-pharmacy industry is beginning to mature. Indeed, one of our experts said they are driving a transformational shift into a new age of how consumers perceive medication and pharmacy as one piece of their overall cost of care and patient experience. 

“We’re seeing that the retail pharmacy, so your CVS, Walgreens, etc, have taken note and are very much behind in their digital strategy when it comes to e-prescribing, e-fulfilment, delivery, embracing a new type of customer experience around what pharmacy can be,” a former director at Capsule said. “That in itself, the investment that those players are trying to make now would indicate that the amount of growth is going to be huge in that direction.”

What also gives digital pharmacies a competitive edge is that they are technology-native and fully integrated. “They are an end-to-end experience and they’ve been able to build a brand on top of that, that separates them from the traditional experience,” the specialist added. “The brand value is highly valuable if Capsule or if Alto, anyone else, can prove a significant capture of market share, because those customers do tend to be quite sticky.” 

So, while e-pharmacies are not yet superseding the incumbents, they are nipping at their heels and playing a prominent role in the broader industry’s innovation.