Vying for Viagra

Part Three TheDot.Com Invasion

On-line drugstores planned a pharmaceutical coup, only to be thwarted by insurance companies who just said no.

Talk about a misdiagnosis! Just two years ago, Internet drugstore upstarts pronounced brick-and-mortar chains a dying breed. Ironically, at the time, not one pure play had yet launched a site. Still, PlanetRx.com, Soma.com, and Drugstore.com executives said consumers would embrace a world where drugs can be ordered from the comfort and privacy of home, drug interactions automatically ascertained, e-mail Rx refill reminders sent, and pharmacists available 24/7. CVS, RiteAid, Walgreens, and Wal-Mart, they predicted, would soon be gasping to stay alive in the $155 billion retail drugstore industry.

Today, the biggest names in on-line drugstores are ... CVS, which purchased and relaunched Soma.corn under its own name, and RiteAid, which took a 25 percent stake in Drugstore.corn and has practically made it a house label. Of the big three dot-corn pharmacies, only PlanetRx remains unattached to a store.

"All the Internet companies are finding things to be vastly different than they originally envisioned," says Martin DeBono, senior analyst with Gomez Advisors. "They were Internet pioneers, but now they're having to learn how to be pharmacists, and that means understanding the importance of relationships."

The first hurdle came soon after the sites launched in 1999, when they discovered that the doyens of American healthcare-insurance companies that foot the bills-weren't going to dance. These "pharmacy benefit managers" (PBMs) work with health plans and HMOs to choose the pharmacies that can accept copays. Planning their own on-line presence, the largest PBMs-representing tens of millions of customers-chose to just say no to the Web stores.

With millions of customers at stake, PlanetRx decided that relationships were going to be crucial to success and joined forces with the third-largest PBM in September. Express Scripts, with 36 million members, named PlanetRx its exclusive on-line pharmacy in a five-year deal worth $ 11 million in annual fees and a 20 percent stake in the dot-com. But otherwise, PlanetRx, which went public in October 1999, remains independent.

Headed by former FedEx COO

William J. "Bill" Razzouk, PlanetRx has won plaudits from users for its extensive on-line health library on everything from acne to yeast-with links to related products-and its delivery and service record. Thanks in part to the Express Scripts deal, net revenues for third quarter 1999 rose to $3.1 million, a 308 percent increase over the second quarter. To Razzouk, the PBM alliance will "increase our ability to serve the millions of consumers who are turning to the Internet ...while maintaining the PlanetRx trademark of superior service." At the time of the deal, some analysts and media observers agreed, rocketing PlanetRx "from long shot to sure shot."

But several are rethinking. "PlanetRx was painted into a comer, and that's why they did that deal. But I'm not as optimistic about their ability to grow this business as some of the other companies," says Mark Husson, an analyst at Merrill Lynch.

A major concern, explains Gomez Ad

visor's DeBono, is that up to 50 percent of the drug market aims to heal acute conditions-your child gets a painful ear infection or your husband's migraine becomes unbearable. A dot-corn like PlanetRx can never capture those sales, since no one will wait a day or more for the needed product.

Competitor Soma.corn looked at what ailed the dot-corn model and decided the cure was joining forces with a bricks-and-mortar pharmacy. Soon after its January 1999 launch, Soma.com president and CEO Tom Pigott got a call from CVS, who, as analyst DeBono notes, "was determined not to be Amazoned." The No. 2 drugstore chain in the U.S. in sales (behind Walgreens) and the No. 1 chain in prescriptions had been noodling around with a site of its own. But it liked what it saw in Soma, especially because the site's emphasis on prescription drugs rather than the "front-store" offerings of perfume and pantyhose matched its own philosophy. CVS was also drawn to Soma's automated fulfillment center-located in West Chester, OH, near five pharmacy schools and three overnight air hubs-and seasoned management team of mail-order and retail pharmacy veterans.

Pigott sold his site to CVS-for $30 million-which swiftly changed the name to CVS.com, while keeping the Seattlebased subsidiary physically separated from the Rhode Island mothership-the better to allow its Internet culture to flourish. This "clicks-and-mortar" model allows the site to capture those otherwise-lost acute sales, since people can order their drugs on-fine, then hop over to the local CVS store to pick up the waiting prescription.

"For us, the benefits have been tremendous," Pigott says, noting that he can now get better prices from manufacturers, have his site widely advertised in CVS stores, and realize partnership opportunities. For example, CVS.corn recently scored a coup by becoming the exclusive on-line pharmacy for the nation's largest PBM, MerckMedco. Even giving up the TO dream of hitting it rich doesn't bother him. "You never hear about the nine of 10 firms that don't make it," he says. "The reality is that in the five months from our launch to acquisition, our existing Soma shares have turned into very real CVS shares."

For CVS, the deal provides an on-line outlet, as well as data on buying patterns that will help it make merchandising decisions. Rather than put a new, untested product on shelves nationwide, CVS can test the product more economically on its Web site first, explains Pigott. Plus, the chain will use the site to help build name recognition in areas of the country slated for store expansion. While the site does lag behind both Drugstore.com and PlanetRx.corn in monthly visitors, Pigott says orders are growing 10 percent weekly on a compound basis and traffic has risen 25 percent on a monthly basis.

Of course, neither CVS.com nor PlanetRx.com can bank on healthy futures quite yet. As Evie Black Dykema writes in a Forrester Brief, "The Amazon vs. Barnes & Noble battle will pale in comparison to this fight." After all, says DeBono, none of the current competitors has yet to face "The Walls:" Walgreens, the nation's largest chain, and Wal-Mart, a powerhouse prescription filler. "That's when things will really get interesting," DeBono says. In the meantime, PlanetRx.com and CVS.com may do well to stockpile some Dramamine in anticipation of the rollercoaster ride ahead.