A look inside Amazon's PillPack acquisition almost a year later

This is an excerpt from a story delivered exclusively to Business Insider Intelligence Digital Health Research subscribers. To receive the full story plus other insights each morning, click here.Last year, online pharmacy PillPack was on track to more than triple its annual revenue to surpass $1 billion by 2020 — just two years after being acquired by Amazon for $750 million — according to a pitch deck reported in CNBC.Amazon wasn't the only one eyeing PillPack: Retail giant Walmart — which has also been inching into the healthcare space — was considering acquiring the startup as well. PillPack was on the up and up with big firms mulling acquisitions to unlocking its potential, which begs the question: Why did PillPack settle on the $750-million-dollar deal — and will the deal pay off for Amazon？Here's what it means: Prior to its acquisition, PillPack was feeling the heat of squeezing into a market crowded with high-flying incumbents.PillPack was slammed with steep costs when it was ramping up efforts to crack into the industry. Costs associated with expansion on top of low profit margins had PillPack shelling out up to $6 million each month. A chunk of these costs was attributed to its software system designed to fulfill the lofty goal of automating pharmacy-related tasks like the prescription renewal process and billing insurance companies. The unsustainable nature of the market likely pushed the startup to seek refuge in a multibillion-dollar company even though it expected revenue to spike in the coming years.Meanwhile, entrenched incumbents continued to gain momentum.CVS, for example, secured nearly $200 billion in revenue in 2018 — up from $185 billion in 2017 — and Walgreens pocketed over $130 billion in sales during its fiscal year 2018 (ended August 31, 2018). And traditional retail pharmacies have been boosting their offerings: CVS rolled out a same-day prescription delivery days before Amazon announced its PillPack acquisition, for example.The bigger picture: With PillPack under its wing, Amazon has a foot in the pharmacy market's door — but it's unlikely to pose an imminent threat to incumbents.It seems unlikely that the majority of consumers will completely ditch the traditional pharmacy experience for a strictly online service. US consumers are still highly dependent on brick-and-mortar pharmacies: CVS and Walgreens tout nearly 20,000 pharmacy locations across the US — and the two fill out a combined 3.5 billion prescriptions annually. Given that its established competitors have such a broad reach — and large physical footprints — acquiring PillPack won't give Amazon an immediate leading position in the pharmacy market.And because PillPack is such a small player, Amazon isn't likely to upend the pharmacy industry just yet. PillPack controls a tiny sliver of the pharmacy market in comparison to big-name pharmacy retailers. But while it's not likely the deal will harm already-thriving pharmacies any time soon, PillPack opens up Amazon to a new revenue stream: The average PillPack consumer was worth $5,000 in 2018, per CNBC. Although Amazon doesn't pose an immediate threat, its tie-up with PillPack could help Amazon learn the lay of the land and act as a launching pad to establishing a pharmacy network that could encroach on traditional players' market shares in the long run.Interested in getting the full story？Subscribe to a Premium pass to Business Insider Intelligence and gain immediate access to the Digital Health Briefing, plus more than 250 other expertly researched reports. As an added bonus, you'll also gain access to all future reports and daily newsletters to ensure you stay ahead of the curve and benefit personally and professionally.>> Learn More Now