Amazon's playbook for upending healthcare just got a lot clearer - here's why it should terrify the pharmacy industry

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• Amazon just signaled its intent to get into the pharmacy business through the acquisition of a startup called PillPack.
• News of the acquisition sent pharmacy stocks into a frenzy.
• The acquisition makes Amazon's healthcare playbook a lot clearer, giving the company the ability to mail prescriptions around the US.

After more than a year of speculation, Amazon just gave a clear indication that it's interested in getting into the pharmacy business.

On Thursday, it acquired PillPack, a small startup that mails prescriptions to people that take multiple medications. The news sent a whole host of pharmacy and drug wholesaler stocks tumbling.

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For Amazon, that clears up a couple of hurdles that had previously hindered its ability to get into the pharmacy market. PillPack's physical pharmacy is located in Manchester, New Hampshire, and the startup can ship medication anywhere in the US with the exceptions of Hawaii and Puerto Rico. Amazon had applied for some wholesale pharmacy licenses in the past but those ambitions hit a snag in December 2017 when its Maine license had been canceled.

PillPack has also already figured out the logistics of how to distribute medications in complex cases where patients may have multiple prescriptions.

Once the deal closes, Amazon could potentially start selling prescription drugs directly through its site, delivering them via mail and impacting retail pharmacies.

Back in February, Bernstein analyst Lance Wilkes laid out the three possible ways Amazon could get into healthcare.

• Amazon could purchase a pharmacy benefits manager, an organization responsible for negotiating lower prices for prescriptions.
• Amazon could partner with another healthcare organization to be the mail order portion of a health plan, like for example working with UnitedHealthcare's OptumRx PBM division.
• And it could also go it alone and just create its own mail-order system and sells that to employers who can add it to their health benefits.

The PillPack acquisition most closely aligns with the idea of Amazon going at it alone - though instead of building a mail-order system from scratch, Amazon can now theoretically just plug in PillPack.

Amazon's joint venture with JPMorgan and Berkshire Hathaway could also lend itself to the strategy of working directly with employers.

By banding these three self-insured employers together, Amazon's roadmap into the prescription drug business might not have to rely on partners or acquisitions of pharmacy benefits managers. Instead, Amazon could have leverage to convince employers, starting with these three organizations, to buy into Amazon's mail service.

The approach of working with employers could put pharmacy benefit managers like Express Scripts and CVS in a tough spot. If employers decide to build their own transparent PBM, they might rely less on Express Scripts' services. National account employers make up about 21% of Express Scripts' gross margin, according to Bernstein.

Wholesalers, which are in charge of shipping drugs to pharmacies and hospitals, for their part have been feeling the effects of Amazon's announcement Thursday. The three largest wholesalers, Cardinal Health, AmerisourceBergen, and McKesson all fell by more than 5% on Thursday. While PillPack isn't a wholesaler, it is something that Amazon, with its distribution expertise, could tackle next. These companies could face direct competition from Amazon if it chooses to distribute prescription drugs.

On the retail pharmacy side, if Amazon with the help of PillPack can send along prescriptions in the mail, it might mean a lot less foot traffic for brick-and-mortar pharmacies. If patients could get their medications shipped directly from Amazon, that could hurt the retail pharmacy business.

Robert Handfield, a professor of supply-chain management at North Carolina State University, told Business Insider in October 2017 that the actual amount of money prescriptions bring into pharmacies isn't all that much. What makes pharmacies a booming business is what else people buy while they come to a pharmacy - snacks, drinks, beauty products, etc.

Say that prescription portion went online. It would be much harder for retail pharmacies to compete with convenience stores, grocery stores and anyone else selling candy bars and deodorant, and much of which Amazon is already selling. In June, CVS announced its plans to offer a delivery service for prescriptions, a move that could buffer itself from some of the effects of Amazon.

"PillPack's visionary team has a combination of deep pharmacy experience and a focus on technology," Jeff Wilke, Amazon's CEO of worldwide consumer, said in a release. "PillPack is meaningfully improving its customers' lives, and we want to help them continue making it easy for people to save time, simplify their lives, and feel healthier."

While it remains to be seen exactly how that plays out, one thing's clear: With Amazon officially in the game, the pharmacy industry is in for a shake-up.