UPDATE 5-Amazon to buy PillPack in potentially disruptive drug retail push

(Adds PillPack, Walgreen CEO, analyst comment, background, graphic; updates shares)

June 28 (Reuters) - Amazon.com Inc said on Thursday it would buy small online pharmacy PillPack, a move that will put the world's biggest online retailer in direct competition with drugstore chains, drug distributors and pharmacy benefit managers.

The deal's potential to disrupt major players across the drug supply chain nationwide prompted a sell-off in shares of possible rivals, while sending Amazon shares up 2.7 percent.

PillPack supplies pre-sorted prescription drugs and other services to people who take multiple medications, a growing market as the U.S. population ages and requires treatment for multiple complex, chronic conditions.

The value of the deal was not disclosed. Bloomberg reported it to be $1 billion, citing a person it said was familiar with the matter.

Pharmacy chains and drug wholesalers lost around $14 billion in market value, while Amazon gained about $5.5 billion.

Shares of CVS Health were down 6.3 percent after falling as much as 10 percent, while Walgreen Boots Alliance was off nearly 10 percent. Shares of drug wholesalers McKesson Corp, Cardinal Health and AmerisourceBergen also fell sharply.

The news comes just a week after a joint venture of Amazon, Berkshire Hathaway Inc and JPMorgan Chase & Co named a chief executive who will be tasked with significantly cutting healthcare costs.

WARNING SHOT

Although brick-and-mortar stores might feel the effects of Amazon's competition, the biggest battles will likely be fought by mail-order pharmacies, which generally serve patients with chronic conditions such as diabetes and heart disease that may require drugs to control blood pressure, cholesterol and other problems.

"PillPack has tens of thousands of customers across the country, will do over $100 million in revenue this year, and has launched PharmacyOS ... designed specifically for customers with complex medication regimens," company spokeswoman Jacquelyn Miller said in an email.

"Amazon's acquisition of PillPack is a warning shot in what is about to become a major battle within the pharmacy space," said Neil Saunders, managing director of GlobalData Retail.

Pharmacy benefit managers (PBMs), such as CVS and Express Scripts, which negotiate prescription drug pricing for employers and health plans, also run large mail-order pharmacies, offering incentives to patients to fill their prescriptions with them.

Doctors, insurers and PBMs have long said patients not properly taking their medicines is one of the main reasons for increased healthcare costs, leading to hospitalizations and more severe health issues. Companies like PillPack and Express Scripts that offer care management services to improve patient compliance are seen as increasingly important in helping control rising costs.

With Amazon's announcement Mizuho analyst Ann Hynes, in a note, said pending health insurer/PBM mergers of Aetna Inc with CVS and Cigna Corp with Express Scripts "are even more critical now."

NOT WORRIED

Walgreen CEO Stefano Pessina, on a conference call after reporting quarterly results, said he was "not particularly worried" about the PillPack deal.

"The pharmacy world is much more complex than just delivering certain pills or certain packages," Pessina said.

That said, Pessina added, "We know that we have to change the level of our services to the customers, and we are working quite hard on that direction."

Some analysts played down the immediate threat.

Morningstar analyst Vishnu Lekraj said he did not believe the deal would make Amazon "a major disruptor" in the near term.

"I believe they bought this to learn about the market and to determine if they are able to make larger investments," he said.

Cantor Fitzgerald analyst Steven Halper noted that PBMs typically require health plan members to use their own mail order pharmacies.

"Even if PillPack is a network provider today, it does not mean it will be a network provider in the future, especially if Amazon has designs of significantly ramping its prescription volume," he said.

Express Scripts dropped PillPack from its network in April 2016, alleging that it had misrepresented itself as a retail pharmacy. The two reached an agreement a month later.

PillPack holds pharmacy licenses in all 50 states. It is an in-network pharmacy for some PBMs and for major Medicare Part D plans, a federal drug benefit to help Medicare beneficiaries pay for self-administered prescription medicines.

PillPack had attracted interest from Walmart Inc, which was looking to buy it for less than $1 billion, CNBC https://www.cnbc.com/2018/04/02/walmart-buying-pillpack-online-pharmacy-sources. h t m l reported in April. The deal is expected to close during the second half of 2018.

(Reporting by Sonam Rai and Ankur Banerjee in Bengaluru; additional reporting by Ben Hirschler in London and Michael Erman and Jilian Mincer in New York, writing by Bill Berkrot; Editing by Anil D'Silva, Bill Rigby and Richard Chang)