Capsule: Bringing Pharmacy Into the Digital Age — A Startup Research Report by Sarina Awatramani

Capsule is a New York City-based startup aiming to change the pharmacy industry by moving away from the long-held brick and mortar model, in favor of a digital experience. Started in 2015, the company has grown to a team of over 200 so far, and plans to continue to grow thanks to recent funding. The company raised a $50M Series B in August 2018, led by Thrive Capital and Glade Brook Investors. The funding came just over a year after Virgin Capital and Thrive Capital led a $20M Series A round in May 2017.

TEAM

Eric Kinariwala: Founder and CEO Education: Stanford University Graduate School of Business- MBA Wharton School of Business- BSE

Originally from Detroit, Eric has experience as an analyst at Bain Capital and Perry Capital. While at these firms, he spent his time investing in healthcare, retail and tech. He is also an angel investor in multiple companies, including Funding Circle, Aviate and Harry’s. He came up with the idea for Capsule after a frustrating experience trying to pick up a prescription for a sinus infection, when he waited on an extremely long line only to find out that the prescription was out of stock. He realized that the established model of pharmacies was not working and needed innovation to solve the problems that he and many other consumers faced, thus leading to Capsule.

In various interviews, he shares that one of the most important things for him is keeping the humanity and empathy in the company, both for customers and within the company itself. On the consumer side, he shares that he is very passionate about keeping people in the equation instead of going completely digital, in order to have customers feel as though they have someone looking out for them. He aims to extend this empathetic environment to the workplace as well, sharing that team members routinely complete tasks outside the scope of their normal role, to foster an appreciation for coworkers and prevent a sense of hierarchy. He seems to try to keep transparency with the company as well and has published personal articles detailing the status and plans for the company at each of their large milestones so far.

Sonia Patel: Chief Pharmacist Education: University of Texas at Austin: Pharm.D

Sonia brings extensive pharmacy experience to Capsule. Coming from a family of pharmacists, she got her doctorate at a very young age, completing the usually 8-year track in just 6 years. From there, she served as Pharmacy Manager at Kroger for over 3 years, and Sam’s Club for 8 years, before joining Capsule. She holds an immunizing pharmacist certification from the American Pharmacists Association and is a certified pharmacist in 5 states, including New York, New Jersey, and Connecticut. She serves as the face of Capsule with a large amount of their marketing materials displaying her interacting with customers to provide a more comforting experience.

Eric and Sonia met in 2005 but joined forces to form Capsule 10 years later. Eric brings vast business experience, while Sonia has extensive experience in the pharmacy industry. They can both attest to the problems facing the pharmacy industry today- Eric from a personal, consumer perspective, and Sonia reflecting the experiences on the side of pharmacists. Together, they are aiming to revolutionize the pharmacy industry by bringing together their complimentary backgrounds.

MARKET

The pharmacy industry is a huge, well-established global industry. In the US, this industry generated $291B in annual revenue in 2018, up 2.6% from the previous year.

Currently, only 1% of revenue comes from online pharmacies, which Capsule is aiming to change. Capsule’s founder, Eric Kinariwala, expects 25% of spending to shift online, allowing the digital pharmacy market to flourish.

Currently, the main players in this industry in the US are the 70,000 retail pharmacies nationwide, where the majority of consumers get their prescriptions. As shown in the following figure, there are a handful of pharmacies with large market share, while others hold significantly less market share. The pharmacies with the biggest market presence are CVS and Walgreens, both of which have been established for over 50 years, and have branches throughout the country.

However, though the task is daunting and change will not happen overnight, a trend towards going digital is starting to be seen. One of the biggest acknowledgments of this trend came with Amazon’s acquisition of Pill Pack, a startup which sorts and delivers daily drug dosages through their online platform. Amazon acquired the company for just under $1B in June of 2018, signaling that changing the way the pharmacy industry works is a thought on more than just the minds of Capsule’s founders. Furthermore, states are starting to require that doctors create prescriptions electronically. New York was the first state to pass this requirement, even enforcing a penalty for doctors who stick to pen and paper. Other states have begun to follow this lead, with Connecticut and Minnesota passing similar mandates, and other states planning the same. This legislature can help to usher in a new digital age in pharmacy. As creating prescriptions through an online platform becomes the norm and the market tends towards digital, Capsule can situate themselves to be ready for the shifts in the market.

GO TO MARKET STRATEGY

Since its founding in 2015, Capsule has operated solely in New York City, with one main pharmacy where prescriptions are filled and customers can choose to come pick up their prescriptions if they want, but mostly serving as a warehouse. Capsule’s main method of trying to enter the pharmacy industry is by differentiating themselves in their niche, by aiming to appeal to the frustrations of current pharmacy customers. Such problems include long wait times, out of stock prescriptions, prescriptions not being picked up and lack of privacy in current pharmacies to foster a relationship where a consumer feels comfortable asking their pharmacist for advice. When asked if he worried about the fate of his company if major players were to, for example, hire couriers to deliver prescriptions, Kinariwala emphasized that the key to Capsule disrupting the market does not lie solely in the fact that they have decreased delivery time. Rather, that is one component of the change they are making as they aim to make the pharmacy a “central point” of all the parties in healthcare.

Kinariwala has shared their strategy to ride the “third wave of e-commerce,” a crucial factor in entering this market. He believes that Capsule is one of the early members of this “third wave.” The first wave was especially focused on price, transparency and convenience, and the second saw companies “reinventing categories with vertically integrated business models.” The third, which is tied with Capsule’s strategy is “blending the human with technology.”

CAPSULE’S COMPETITION

CVS is Capsule’s biggest competition in terms of their place in the current market which is comprised of mostly brick and mortar pharmacies. They were founded in 1963 and have since expanded to have over 9,600 locations nationwide, which include both their stand-alone locations and pharmacies located within Target. According to MarketWatch, their revenue for 2018, was $194B, up 5% from the year before. However, only about 29% of that is from prescription drug sales, the aspect of CVS which Capsule is going up against. They do offer a prescription delivery service as well, though it depends on location whether the service is available and which products are available for delivery. The delivery window can range from same day service to up to 2 days. Additionally, CVS recently merged with Aetna healthcare, expanding its reach and services. With the merger, they have noted changes for consumers may include added health services and improvement of the customer experience. CVS is a major player in the pharmacy industry and represents exactly the model that Capsule is trying to uproot. They have exponentially larger revenue than Capsule and are located in cities and towns nationwide, while Capsule currently operates only in New York City. Although their model may offer a model that leads to many customers frustrations, they have a long-established reputation which creates a sense of trust of consumers and may lead them to default to CVS, despite aggravations. Furthermore, following the merge with Aetna, and proposed plans of improving health services, CVS may be working towards solving some of their own customers’ frustrations, which could prevent them from switching to an alternative like Capsule. If Capsule hopes to go up against such a key player, therefore, they must emphasize to consumers how their company creates solutions which eliminate the problems of current pharmacies, in order to gain credibility and market share.

Pill Pack is another startup aiming to change the pharmacy industry, similar to Capsule’s goal. Founded in 2013, they had $117M in funding, before being acquired by Amazon in June 2018. According to Owler, Pill Pack has $8.7M in revenue annually. Pill Pack is aiming to make managing medicine easier, removing the visit to the pharmacy and eliminating the possibility of mixing up or forgetting daily medicine. At the beginning of each month, customers receive their medication for the month, including OTC drugs, vitamins and inhalers and pills are packed by date and time of day when they need to be taken. The consumer then simply has to open their daily pack, with all their pills for the day inside. Pill Pack is similar to Capsule in its motivation of trying to change the way consumers interact with pharmacies and is trying to eliminate the need for visiting a pharmacy in person. However, Pill Pack currently focuses on people managing multiple medications, in order to simplify the process of keeping track of medications. Like Capsule, they do not charge consumers more for their service, as for both companies the customer only pays their normal copay. They operate on a monthly subscription model and take up to 2 weeks to deliver the first pack, whereas Capsule is targeted towards fulfilling any prescription that a doctor writes within the day, rather than solely reoccurring prescriptions. However, with the recent Amazon acquisition, PillPack’s resources have grown and could expand to be more of a direct threat to Capsule if they begin to move away from just monthly prescriptions.

PRODUCT

Switching from a traditional pharmacy to Capsule takes only a few minutes, and users do not have to have an account prior to their doctor creating their first prescription. Once a prescription is created by a doctor, patients receive a text alerting them that Capsule has received their prescription. Customers can log on to Capsule and have their current prescriptions transferred to Capsule instantly. Currently, Capsule is licensed by the New York Board of Pharmacy and has contracts with all major insurance carriers.

Once they have entered their personal information and insurance details, customers can browse their prescriptions, along with the prices of each. This allows for transparency and eliminates the surprise of an ultra-high bill when going to pick up a prescription. If the chosen prescription is too costly and the customer would perhaps favor the generic version, Capsule does the price comparison for them and consumers can choose a less costly alternative. By simply using the in-app messaging, calling or texting Capsule, customers have increased choice and flexibility with their prescriptions. In fact, Capsule prides itself on this accessibility of help for customers. Customers may choose whichever method of contact they prefer, and start a private conversation with Capsule’s pharmacists who create a welcoming environment for questions. Chief Pharmacist Sonia Patel is the face of this aspect of Capsule’s brand, with much of their media emphasizing how she starts her conversations with “Hello, Dear,” to further emphasize the comfort that Capsule cultivates.

Once users have set up their account and paid for their prescription, they can select a 2-hour window which best fits with their schedule to have the prescription delivered, anywhere from their house to the office. The package is delivered within this window, in a tamper-evident package, protecting the privacy of the recipient. Not only is the package delivered in Capsule’s easier-to-read packaging, it includes a hand-written note from their pharmacist, contributing to their “Capsule cares” message.

The experience does not end with delivery, though. Kinariwala shares that their predictive analytic software keeps track of when customers will need refills, to ensure that they are not out of stock. In addition, customers have access to pharmacists whenever they have questions or concerns.

METRICS

• Grew from 75 to 250 full-time employees in 2018, and have shared plans to double the number of employees in 2019

• Raised $50M in 2018, led by Thrive Capital and Glade Brook Capital

• $5M annual revenue, according to Owler

• Headquarters in New York City

• They have not released an exact number of customers, only sharing that they serve “tens of thousands of New Yorkers”

FINAL THOUGHTS

Capsule is taking up a bold mission by aiming to completely change the pharmacy industry as we know it. They definitely have the support from very influential venture capitalists, especially with their longstanding support from Thrive Capital. Thrive is Josh Kushner’s venture firm, one of the co-founders of Oscar Health. Though Oscar operates in a different sphere of the healthcare industry, the support for Capsule from such an influential person in healthcare can be an asset as they continue to grow. Furthermore, the industry that they are operating in has been the subject of much discussion lately, as the high cost of drugs in the United States has become a topic on the political agenda. While there have yet to be any sweeping changes regarding this topic, one thing that has resulted is increased awareness of the wide range of prices that drugs have in the US, dependent on where they are sold.

Shown in the figure to the right, from the US Public Interest Research Group, a carton of insulin pens can vary in price by $349, a substantial sum for those who need to consistently fill this prescription. Currently, patients are encouraged to “shop around” in order to find the best prices for the prescriptions they need. However, Capsule eliminates the hassle of shopping around by including price transparency and finding the lowest prices for its customers as one of its solutions to the current model. As consumers have now recently been made even more aware of the range of prices drugs can have, Capsule can appeal to an even wider group of people if they highlight and emphasize the price transparency that their service offers.

The founders have not been shy about their desire to expand to other cities apart from New York in order to reshape this industry, and recent funding especially will fuel this growth. While moving to other cities and towns is definitely necessary to interrupt this industry, they must be careful to preserve the values which they are so adamant about expressing to customers. Their press materials highlight “over 1,000 perfect reviews on the App Store,” but recent Yelp reviews are not as glowing. While there are still a large number of positive reviews, those from October onward increasingly tend towards lower ratings. A common theme is that “Capsule used to be good.” Presumably, as a result of expansion, customers expressed that their texts were not replied to for hours or even days or that they were told prescriptions were not in stock — the very same things that Capsule prides itself on doing differently than current pharmacies. Though every company faces challenges as they scale, customer experience should be a top priority for a company whose model is grounded in making the pharmacy the hub of healthcare and solving the current consumer frustrations.

If they do prioritize their goal of improving the “experience” by making sure that customer service does not get lost as they scale, Capsule has the potential to develop its niche and lead the way towards remodeling the pharmacy industry.

Disclaimer: All information in this report has been aggregated through public news reports/articles or Capsule’s website itself. Any misrepresentation of the company is purely accidental. BV is more than willing to correct any mistakes.

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