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The PillPack-Amazon Deal and the Importance of Developing a Strategic Plan for Compliance & Growth

It was recently announced that Amazon will be acquiring the online pharmacy, PillPack, for approximately $1 billion, with each of the founders receiving approximately $100 million each. PillPack’s rise and success is one that all pharmacy owners strive for and hope to achieve. What can be learned from PillPack’s success story is that in order to reach these goals, pharmacies need to have clear strategic and operational plans, to account for obstacles in the path of growth, and to maintain legal and regulatory compliance.  PillPack’s story illustrates this well, and these plans should account for major events, including influx of private equity or venture funding, maintaining regulatory compliance (including Board of Pharmacy requirements), and forecasting scrutiny from Pharmacy Benefits Managers (PBMs) and developing a plan to grow within the PBMs’ contractual framework.

Private Equity

Given its innovative technological platform and delivery model, one of the keys to PillPack’s success was its ability to raise private equity and venture funding. Since its founding in 2013, PillPack raised $118 million in venture funding from over four different equity partners. But equity funding does not happen in a vacuum. There are several steps pharmacies should take prior to seeking equity funding, and to position themselves to go through this process successfully.

First, from a corporate structure perspective, it is important that pharmacies are poised to receive an influx of capital and owners. This means reviewing and potentially restructuring operating agreements or corporate entities to ensure that they can more easily facilitate the entry of new partners and capital.

Second, pharmacies must conduct a thorough review of their contractual arrangements, insurance coverages, and strategic partnerships to ensure that they will withstand the close scrutiny of buyer’s sophisticated counsel. This includes evaluating levels of insurance to avoid gaps in coverage, examining payor contracts to ensure they are appropriately suited to the pharmacy’s business practices, and reviewing manufacturer arrangements to ensure legal compliance. All this amounts to essentially “Sell-Side Due Diligence,” so that when a sophisticated buyer comes in, the process moves smoothly. 

Finally, all of these efforts are for naught if the pharmacy does not have sophisticated deal counsel and is unable to complete the transaction. In taking on additional equity partners, there are a myriad of reporting and disclosure requirements when undergoing a change of ownership, including PBM notification requirements and State Board of Pharmacy approvals. Failing to meticulously address these items can result in professional discipline or loss of a key payor contract.

Board of Pharmacy Compliance

As an online pharmacy with patients in all 50 States, PillPack had its fair share of pharmacy practice laws to comply with, most important of which stemmed from ensuring proper licensure in each of the States it serviced patients. In order to continue to grow and to avoid setbacks from disciplinary actions taken by State licensing boards, pharmacies must employ robust compliance programs to ensure proper licensure (for both the pharmacy and the pharmacist-in-charge, where applicable) in each State.  Receiving discipline from any one State Board of Pharmacy can have a cascading effect on a pharmacy, leading to reciprocal discipline from other Boards of Pharmacy and even network termination from PBMs.  Likewise, pharmacies must also ensure compliance with pharmacy practice requirements, such as prescription labeling requirements, pharmacy operations requirements, and shared services/central fill requirements, as the specific rules may vary from State-to-State. One recent area of increased enforcement by State Boards of Pharmacy has been in the context of remote data entry and prescription processing. With the advent of pharmacy “hubs” and integrated pharmacy systems, many opportunities exist to centralize and streamline the prescription entry and adjudication process.  However, if not done properly, this can lead to regulatory exposure from not only State Boards of Pharmacy, but even Federal regulators, such as the Office of Civil Rights. Finally, what set PillPack apart from most was its ability to use pharmacy automation, including behind-the-scenes software that automated many basic pharmacy tasks. With this new technology comes new forms of regulation by State Boards of Pharmacy relating to automated dispensing systems and telepharmacy, in particular.  Thus, there are numerous legal issues related to these forms of automation that must be complied with in order to successfully grow a pharmacy.

PBM Contract Compliance and Strategic Planning

Perhaps the greatest factor in PillPack’s success was its ability to navigate the complex world of prescription drug reimbursement by PBMs. With three PBMs controlling more than 80% of the marketplace, remaining in good graces with each of the major PBMs is crucial to a pharmacy’s success.  But even PillPack’s success story was not without drama and suspense. 

In April 2016, PillPack was involved in a very public contract dispute with the nation’s largest PBM, Express Scripts. Express Scripts sought to remove PillPack from its networks, claiming PillPack had allegedly “misrepresented” itself as a retail pharmacy, when it should have been contracted as a mail-order operation. This action by Express Scripts is emblematic of many PBMs’ policies and tactics to remove pharmacies for mailing (or other trivial or pretextual reasons) to stifle competition. PillPack was ultimately able to resolve this dispute with Express Scripts, due to having a strategic plan in place. This included not just challenging Express Scripts’ attempted actions through a multi-pronged approach, but developing a broader strategic vision aimed at growing within the bounds of the payor contractual requirements. This is a perfect example of why a strategic plan is so critical to any pharmacy’s success in this environment.

Pharmacies must routinely review their business structure and practices to ensure compliance with PBM contracts, and when necessary, take action to directly engage the PBMs. Pharmacies must also take proactive steps in strategically growing the infrastructure of their business, while reviewing their claims submission practices, to avoid costly PBM audits or network terminations.

Frier Levitt routinely advises pharmacy and other life sciences clients on strategic growth plans, taking into account not just legal and regulatory compliance, but also the proactive steps pharmacies can take to avoid interruptions in network participation or audit recoupment. We have assisted hundreds of pharmacy clients restructure their businesses and engage in strategic growth plans, positioning them well for financial or equity events. Contact us to speak to an attorney about developing a strategic plan for your pharmacy.