Startup gets $50M in quest to build a better drugstore

NEW YORK – An online pharmacy seeking to unseat CVS Health Corp. and Walgreens raised $50 million, helping fund its plan to improve how drugs are packaged with a simple idea: dividing up customers’ pills by the time and date they should be taken.

PillPack Inc.’s third round of funding was led by Charles River Ventures Inc., the company said in a statement Wednesday. The startup will shake up the pharmacy business the same way Amazon.com Inc. changed retail, said George Zachary, a partner at CRV.

“It’s what’s stopped every other large company in the space: innovation,” said Zachary, whose other early investments include Twitter Inc. and Yammer Inc., which was acquired by Microsoft Corp. “I don’t see CVS or Walgreens being innovative. They’re big enough that they’re not paying attention.”

To be sure, PillPack faces daunting odds in a market with large, well established competitors who have more leverage to negotiate prices. It’s been hard for the startup to enter the industry without that scale, though Zachary said insurers like the added competition.

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Demand for pharmacy services has been growing as the U.S. population ages and drug prices soar. Drugstores like CVS Health Corp. have responded by buying health supply-chain and specialty pharmacy companies to expand beyond selling medication in drugstores. PillPack is focusing on routine prescriptions and even over-the-counter drugs, going after the 85 percent of patients who fill their orders at retail locations, according to CRV’s research.

CVS didn’t respond to requests for comment. In a statement, Walgreens Boots Alliance Inc. said it’s “constantly innovating the practice of pharmacy, such as pioneering the availability of vaccinations and health tests from pharmacists, and developing our Walgreens app to become the third-most downloaded consumer app for mobile devices.”

With the new funding, Boston-based PillPack is hiring more employees and opening physical stores dedicated solely to pharmacy services – no separate grocery area to pick up a bottle of soda. Since starting in January 2013, the company has delivered over 1 million packages, introduced its service in 47 states and hired about 75 employees.

The company doesn’t disclose its revenue or profit figures. Its model works like this: Prescription pills, vitamins and over-the-counter drugs are packaged into daily doses and delivered every two weeks via UPS. Robots do the sorting, leaving pharmacists free to chat online anytime of the day and coordinate medications with health providers.

Mail order

The mail-order pharmacy industry is dominated by drug- benefit managers like CVS’s Caremark and Express Scripts Holding Co., which processed 82 million and 129 million mail-order claims last year, respectively. Most companies are moving away from the traditional pharmacy business, according to Charles Rhyee, an analyst at Cowen & Co.

“We’re coming to the end of a 15-plus year super cycle of generic drug introductions,” said Rhyee. Generics allowed retailers to negotiate better pricing, and with that shrinking, “companies are going to start asking, where is the next area of growth?”

In May, CVS announced plans to buy nursing-home pharmacy company Omnicare Inc. for $12.7 billion. Walgreens has focused on ramping up its beauty and cosmetic offerings after merging with Alliance Boots in December 2014.

Robot sorters

That makes PillPack’s strategy to deliver medications and build physical stores a bit of a throwback. While PillPack is starting without a single location, CVS and Walgreens each have about 8,000 in the U.S.

“For a long time, folks have talked about pharmacies moving more and more towards customer care,” said CEO TJ Parker. “They can’t do something as simple as syncing up multiple prescriptions for the same day.”

The company works with most of the large pharmacy benefit managers like Express Scripts and Caremark, and its prices are competitive with other pharmacies for consumers who have a copay, Parker said. The company accepts most forms of Medicare Part D, but isn’t covered by Humana Inc., Cigna Corp. or state Medicaid plans.

PillPack has raised $62 million to date. Other funding in the third round came from Accel Partners, Menlo Ventures and Sherpa Ventures.

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