Tuesday, February 16, 2021

The Promise and Limits of Digital Pharmacies

Does pharmacy need to be disrupted?

Venture capitalists clearly think so, judging by the billions they have put behind technology-enabled digital pharmacies. Below, you’ll find our list of 14 leading contenders along with funding levels. These companies have not gained significant pharmacy industry market share, but their revenue growth rates are impressive.

Alas, many of these digital pharmacies seem to have misdiagnosed their relative advantage versus today's pharmacies. 

That’s why I believe that digital pharmacies’ biggest impact will come from forcing the industry incumbents to improve their businesses and approach to patients. Pharmacies and PBMs should absorb the technologies and consumer-oriented mindsets of the start-ups.

Digital pharmacies more intriguing disruption comes from combining prescribing and dispensing. But this novel idea seems to have limited applicability to the broader prescription market.   

Read on and let me know what you think.

The material in today’s article is adapted from our forthcoming 2021 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers, now available for preorder at special discount pricing.


The new crop of digital pharmacies share many (but not all) of the following business strategies:
  • Home delivery of individual prescriptions
  • Operating at least one brick-and mortar retail location (so that the pharmacy can remain in a PBM’s network)
  • Dispensing 30-day prescriptions, not 90-day maintenance prescriptions
  • Offering a mobile app so consumers can manage their account, order prescription refills, and schedule delivery
  • Providing telehealth consultations with prescribers

The table below highlights 14 leading digital pharmacies, along with the total amount of funding raised from outside investors. The 11 companies with available funding information have collectively raised an astonishing $1.6 billion. Two of the companies are publicly traded.

[Click to Enlarge]

This list excludes start-ups that facilitate dispensing and delivery from existing pharmacies or dispense on behalf of other healthcare businesses. These companies and the amount of funding raised include: NimbleRx ($60 million); Phil ($42.6 million); Truepill ($113.4 million); and ZipDrug ($13.4 million).

Digital pharmacies are small but growing quickly:
  • Ro launched in 2017 and has revenues of reportedly more than $250 million. Ro raised an additional $200 million in mid-2020 and is reportedly valued at more than $1.5 billion.
  • Revenues for Hims & Hers have grown from $27 million in 2018 to an estimated $138 million in 2020. Hims & Hers projects that its 2022 revenues will be $233 million. In January, Hims & Hers became a public company by merging with Oaktree Acquisition Corp. Since going public, its market capitalization has more than doubled, from $1.6 billion to $4 billion.

The key question: Will the free-flowing capital behind digital pharmacies build sustainable businesses with long-run profitability? Or are they simply creating a compelling story so the venture capitalists and owners can cash out?

History offers some insights.

Twenty years ago, in the wake of the dot-com bust, I co-authored Shakeouts in Digital Markets: Lessons from B2B Exchangesin the California Managed Review. Exhibit 2 of this paper sketches out a digital market continuum from breakthrough to re-formed markets. We observed:
“The first lesson is that pure-play dot-coms will survive and prosper only in breakthrough markets. These online markets are the handful of applications that could not have been realized without the Internet. A corollary is that established firms will have the upper hand in markets that have been re-formed by the Internet. In re-formed applications, network technologies help to squeeze out costs and facilitate interactions, but don’t change the basic structure and functioning of the market.”
The lessons from that era remain relevant. A top-quality app may improve the patient experience, but it does not fundamentally alter the dispensing business. Consumers are reluctant to disrupt systems that work, even if those systems are partially uneconomic or somewhat inefficient. Many digital pharmacies do not act as if they are in re-formed markets. 

That’s why some of these companies seems to have misdiagnosed their relative advantage versus pharmacy-industry incumbents. Competing to dispense low-priced generic prescriptions will not provide above-market profits to compensate for VC funding.

Notably, none are attempting the true disruption of selling all low-cost generics at cost-plus pricing. Then again, Amazon isn't trying, either.
Digital pharmacy businesses with valuable technology assets are becoming attractive acquisition candidates for incumbent companies. For example, Walmart bought CareZone’s digital prescription technology—but notably did not purchase the CareZone pharmacy. UnitedHealth Group’s OptumRx business purchased DivvyDose, a small pharmacy with a unit-dose packaging business that is similar to Amazon’s PillPack business.  Target acquired the delivery service Deliv, which had raised more than $80 million in funding and operated a same-day prescription delivery service called Deliv Rx.

Digital pharmacies, however, are pioneering the more novel combination of telehealth prescribing plus dispensing directly to patients. The fastest-growing companies provide a fairly frictionless, virtual method by which a patient can access a willing prescriber. 

To date, this market has been limited to product categories with a high proportion of cash-pay prescriptions and a big dose of self-diagnosis. Examples include sexual health, hair loss, and smoking cessation.

It’s not yet clear how far this niche opportunity can expand into new-to-therapy prescribing for medically complex conditions. 

Consider the experience of telehealth during the 2020 pandemic. Virtual visits resulted in many fewer new therapy initiations. See the “NBRx Per Patient Visit” table in Five Surprising Facts About COVID-19 Prescription Trends for Retail and Mail Pharmacies.

That’s one reason retail pharmacies are building physical locations with broader healthcare services, including prescribing. Many of these locations also offer telehealth, complementing the virtual models of digital pharmacies. (See Section 1.4.1. of our forthcoming pharmacy/PBM report.)

Digital pharmacies may again prove Arthur C. Clarke correct: We underestimate the effect of technology in the long term, but overestimate it in the short term.

NOTE: This post was revised on February 20 to reflect updated information about CaryRx, Deliv Rx, GeniusRx, HoneyBee Health, and NimbleRx.

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