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Tough sell for online drugs
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November 1, 1999: 4:06 p.m. ET
Pharmacy sites, retail chains team up -- but prescriptions hard to fill via Web
By Staff Writer Martha Slud
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NEW YORK (CNNfn) - It's happened with books, music and toys -- online retailers sweep onto the Web, hold flashy IPOs and leave traditional chains playing Internet catch-up. But when it comes to the pharmacy business, online merchants are finding it a tougher arena to enter.
While virtual pharmacists tout speed, ease and cost-efficiency as reasons to do business on the Web, putting their theories into practice has been another story. The retail prescription drug industry is based on complicated third-party arrangements with insurers and prescription drug benefits managers, called PBMs, the gatekeepers of drug coverage who see online startups as competitors to their lucrative mail-order prescription businesses.
Plus, the Amazon.com (AMZN) formula of a pure, cyber-based retailer doesn't quite work when applied to prescription drugs. An estimated one-half of all prescriptions need to be filled right away, and patients can't wait for items to be shipped. Also, many customers want the face-to-face contact with a neighborhood pharmacist.
"It's a very complex industry," said Martin de Bono, who follows online drugstores for electronic commerce research firm Gomez Advisors. "There's a lot of industry players that the newcomers cannot ignore."
As a result, Web-based retailers have been forced to craft a series of deals to get access to insured customers. At the same time, the big chains have been rattled by the Internet's potential and by the impressive valuations online pharmacies PlanetRx and Drugstore.com -- a startup headed by former Microsoft executive Peter Neupert that is 26 percent owned by Amazon - have racked up since going public this year.
CVS (CVS) and Rite Aid (RAD) both have made major deals recently to expand their Internet operations, while No. 1 drugstore chain Walgreen (WAG) recently launched a revamped online prescription drug service, and Wal-Mart (WMT) is planning to offer a Web-based pharmacy next year as part of its long-awaited Internet initiative. Other drug store chains such as Drug Emporium (DEMP) and J.C. Penney's (JCP) Eckerd chain also have launched virtual pharmacies.
For now, however, the online drug store market is tiny -- and is expected to grow only incrementally over the next few years. But even small growth is significant because the industry is so massive. Also, the drug market is expected to boom over the next few decades.
Online merchants are finding the pharmacy business a tough arena to enter
"As the U.S. population ages and the Baby Boom generation ages, the bigger part health plays in people's lives," said David Restrepo, health care analyst at Internet research firm Jupiter Communications. "Those sorts of expenditures are going to increase."
Jupiter forecasts that the online market for prescription drugs will grow from virtually zero in 1998 to 0.6 percent, or $966 million, of the estimated $161.5 billion pharmaceutical market in 2003. And that doesn't include the $17 billion-a-year over-the-counter drug market and the $22 billion annual personal care products markets, two sectors that are also seen as online growth areas.
Performance of Drugstore.com
stock since its July IPO.
Teaming up
CVS (CVS), the country's second-largest drug store chain, paid $30 million in May for Seattle-based Soma.com, a privately held Web pharmacy, and recently forged a major Internet alliance with the prescription drug management unit of pharmaceutical powerhouse Merck & Co. (MRK). Under the deal, CVS will be able to accept prescription orders from Merck-Medco's estimated 50 million members over the Internet.
Meanwhile, No. 3 drug store chain Rite Aid recently bought a 21.6 percent stake in Drugstore.com (DSCM) for about $7.6 million. More important for Drugstore.com than the relatively small cash investment is the partnership agreement that gives it access to Rite Aid's pharmacy benefits program. Together with partnerships with vitamin retailer General Nutrition Centers, which invested $2.4 million in cash for an 8 percent stake in Drugstore.com, the deal is worth another $234 million in non-cash partnerships.
Analysts said these types of deals make sense because it allows doctors to order prescriptions online, then the patient can go pick it up or wait to get it through the mail. In Internet lexicon, this type of link has been dubbed "clicks and mortar."
Meanwhile, PlanetRx (PLRX), the second Web-based pharmacy to go public, is in a strategic partnership with Express Scripts Inc. (ESRX), the third largest pharmacy benefits manager in the U.S. The deal gives Express Scripts a 19.9 percent in the virtual pharmacy. But so far PlanetRx has not yet inked a deal with a major drugstore chain, and the company is not likely to reach its full growth potential unless it does, de Bono said.
PlanetRx was the second online
drugstore to go public.
Like everything else on the Internet, analysts say the e-drug store sector likely will shake out to a handful of big players. Some drug store sites also could get wrapped into large "super health portals" offering health content and business-to-business applications.
And as for independent mom-and-pop pharmacies, which comprise an estimated one-third of all U.S. pharmacies, the Internet will never transplant them -- though they too should think about adding online operations, analysts say.
"The corner drug store will never disappear," said de Bono. "It's just too much of an institution."
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