PillPack: the new kid on the block in the world of pharmacy
PillPack is a Somerville, MA-based an independent online pharmacy start-up founded in February 2014, with $62.5M raised to date (valuation unknown). In less than two years, PillPack has distributed over a million individual dose packets, acquired licenses to serve patients across 47 states, and is estimated to generate $15-$20M in revenue this year.
Business model
The business model of PillPack is not dramatically different from traditional pharmacies. The easiest comparison is a mail-order pharmacy, which most retail pharmacies and health plans already have. The company buys 
medications from wholesalers and delivers the goods straight to patients every two weeks. The packaging can be considered unique, with patient’s medications pre-sorted into personalized small packets in a dispenser (with detailed instructions) and patient can manage its medications entirely through its website. While having no physical stores, they offer 24/7 patient support through e-mail, phone, and webchat. PillPack also perform all of typical back-end pharmacy tasks such as refill management, prior authorization, etc. Patients can sign-up easily online, manage their prescriptions through the website and its mobile app.
For the first few months, PillPack charged a $20 fee for its “additional” services to patients; however, soon after, PillPack dropped the fees and let patients pay only their usual co-pay that they would pay in any other pharmacies. Its primary source of revenues is reimbursement (minus cost) from health plans and a small dispensing fee, with average gross profit per 30-day prescription at $10-$15.
Operating model
You can argue that nothing that PillPack offers is new to the pharmacy world; however, PillPack’s innovative operating model is what enables this 60-person company to pose a substantial threat to pharmacy giants like CVS and Walgreens in such a short time period.
PillPack’s operation is centralized to one team in one office. In an industry where margins are thin, ability to centralize operations is a huge advantage. While it may also have less scale compared to other pharmacy giants, it allows the company to be flexible and adapt easily along the rapidly changing industry. For example, PillPack has a central prescription filling system, in which their robots are heavily leveraged in filling and quality assurance, freeing up pharmacists to focus on patient service. Because much of retail pharmacies’ operations are reliant on individual retail stores, investing in robots would be quite capital-intensive. PillPack can centralizes its investment, which allows the company to sustain the business without changing the business model drastically.
Technology is the centerpiece of its operations. Its online-based platform enables PillPack to reach many patients across various geographies in a short period of time. The fact that it cannot serve patients with urgent prescription needs is less of a concern as much of the dollars in the pharmacy business come from dispensing maintenance medications. Its emphasis on technology and centralized model also gives the company a huge competitive advantage. While retail pharmacies have to go through considerable alignment across labor force or invest heavily in capital across all stores to rollout a new service or product, PillPack can easily change a feature or two in its website or mobile app that can have a huge impact on patient experience. It allows the company to fail fast, and fail cheap. PillPack to be flexible in its staffing model, increasing accessibility of care for patients.
Concluding thoughts
Pharmacy is a tough business. It is a heavily regulated industry and a lot of restrictions due to pressures from high power partners such as health plans. PillPack is an interesting example of a company that leverages its innovative operating model to enable a traditional, constrained business model in the industry. While arguably each component of PillPack’s products and services is nothing new to the industry, its true secret is appropriately aligning all components of the business.
This does not mean PillPack will face no challenges. The combination of this business and operating model is not impossible to replicate. While it may take a lot longer, larger pharmacy chains with more resources can easily invest in this capability. In addition, traditional pharmacies are very much focused on expanding beyond pharmacy services (e.g., retail clinics), leveraging its accessibility and low cost in delivering simple health care advice via pharmacists. Can PillPack offer anything beyond prescription delivery, given its limitations in opportunities for face-to-face interactions? With broader health care industry rapidly moving towards consumerization, PillPack definitely is still at an advantage due to its operating model; however, it will be interesting to observe how it can sustain and expand its business.
Sources:
https://www.ideo.com/work/disrupting-the-drugstore
center/assets/files/WEGOHealth_PillPack_FAQs_2014-09-23.pdf?1411555834
http://www.betaboston.com/news/2014/05/30/pillpack-gets-rid-of-20-subscription-fee/
http://www.drugchannels.net/2012/12/surprise-cms-computes-and-publishes.html
http://bostinno.streetwise.co/2015/10/27/medication-management-insightfil-startup-takes-on-pillpack/
Interesting post, Sojung. I would agree that the pharmacy value chain (from retail pharmacies to wholesalers to PBMs) is a very tough place to compete – it is for this reason that so much industry consolidation has occurred over the last few years. Rising drug costs and the pendulum shift from generics to specialty pharmaceuticals (growing at double digit CAGRs) has prompted the largest pharmaceutical buyers to consolidate to gain a scale advantage in sourcing drugs. Accordingly, I wonder if PillPack can remain competitive. The potential game-changer could be whether there is a regulatory change that allows for greater original use dispensing, which is more common in Europe.
Great post, Sojung. I too am concerned about the long term success of this business model. Beyond simple packaging and what must be a good web user interface, I don’t see how PillPack is well differentiated from the larger mail-order pharmacies. The web interface should be an easy challenge for big pharmacies to overcome, and while simple packaging would require some retooling of their distribution system, I don’t think that this company will be able to make it without other revenue streams.
Thanks Sojung, interesting post. While working with a VC fund, I came across a lot of small companies trying to disrupt this space. The biggest challenge, in my opinion, was the constant battle with maintaining unit economics given high cost of delivery and relatively low average order values. How does PillPack plan to deal with this issue, especially with the competition from larger mail-order pharmacies? I believe drug orders can be characterized into the following two – Type 1. high value chronic disease drugs that are higher in value and lesser in number, and Type 2. lower value generic drugs for acute purposes which are low value. The former category is obviously more favorable with high repeats, higher value orders per delivery and higher opportunity for differentiation through patient service. I’d love to understand whether PillPack might be thinking of customer targeting in a similar way. How are they looking to expand the share of the Type 1 customers, and how large is this market anyway? Will their operating model differ as they try to target these two types of customers?
Sojung, I really enjoyed reading your post. I had heard and read a little about PillPack but didn’t know much about their back end operations before reading your post. The use of robots makes a lot of sense to me in this industry, so that individuals are freed up from what is essentially bean-counting and can use their knowledge base for more complex questions. One potential issue I wonder about is what happens when individuals prescriptions change before they are done with a PillPack? I imagine that this could cause a lot of confusion for patients in terms of what to do with the medication they should no longer be taking and that there could be a substantial risk of patients taking the wrong dose.
Cool post, PillPack is certainly doing something unique in the industry by making themselves a personalized package mail order service. I think you are spot on in your conclusion that while their operating model helps them keep costs down now, their competitive advantage will not be able to fend off competition in the long term. I could definitely see another larger mail order service (e.g, Express Scripts) pretty easily copying this distribution type. By leveraging their existing PBM business, they would have an existing customer base and be able to subsidize their “personalized” service if necessary during its developmental stages. Another outstanding question is how will PillPack increase its awareness and drive patients to mail order? Without an existing pharmacy and/or PBM business, I see it being a challenge for them to gain patient awareness. One option to drive future growth is partnering with insurance companies (health plans that keep PBM services in-house, but lack their own mail order service). This would allow them to still keep operational costs down, while reaching a larger patient base. Their incentives would be well aligned, particularly if PillPack can show that their service increases medication adherence at statistically significant levels over an extended period of time.
Thanks Sojung! I heard of PillPack this summer at IDEO as they were one of the companies that spun out of IDEO’s Entrepreneurs in Residence program. IDEO invested a ton of resources in working with the PillPack team to uncover customer needs and build a business/operational model around that and I’d be curious to see if they are able to continue to leverage IDEO innovation frameworks to stay ahead of the competitive forces that you pointed out. Using human centered design to uncover latent customer needs when you are new to the market is one thing, but once you are an established player and compete with more established players, we frequently see companies focus less on customer needs. I’m curious to see if they are able to stay ahead of the competitors by focusing on their customer value creation approach.
Great example of operational innovation enabling a disruptive business model. It’s clear that its success is built on centralization, but I wonder whether Pill Pack can build on its technical base to further replicate amenities of conventionally distributed services in the future. For instance, remote pharmacist support or automated delivery might unlock local penetration without requiring a departure from the company’s operating thesis. Might this be a way to stay ahead of competitors who can easily replicate centralization?